Oligopoly Flashcards
Characteristics of an oligopoly
Few firms have a large market share
High market concentration ratio
Product differentiation exists
Non-price competition exists
High barriers to entry
Interdependency —> firms make decisions based upon how competitions will react to decisions
Supernormal profits occur
Behaviours of oligopolistic firms
Price leadership —> dominant firm with strong brand loyalty, has the market power to change prices
Price stability —> firms can’t tend towards price wars —> decrease profit and revenue —> only richest firm with largest cash reserves survives
What is the theory of the kinked demand curve
Price raised above P1 —> elastic (reduction in revenue) —> consumer can switch to lower priced competitor
Price reduced below P1 —> inelastic (reduction in revenue) —> competitors will follow —> gain extra customers but goods are at lower prices
Increase revenue —> increase in non price competition to shift demand curve —> cost of non price competition < revenue gained
Define collusion
Firms make joint agreements to exploit consumers to increase their own profit
What types of collusion are there
Supply restriction —> push up prices —> increase in revenue
Market sharing —> firms agree not to compete in certain market segments —> rivals free to be monopolists in that segment Firms act like a monopolist
Define oligopoly
Market dominated by a few large firms
What is game theory
Temptation to cheat –> explains why collusion and cartels do not work in the long run
Incentive to be the first firm to break price agreement –> lower prices and steal market share
Define nash equilibrium
Situation where all participants in a game are pursuing their best possible strategy given the strategies of all other participants
What is the dominant strategy in nash equilibrium
The most low risk strategy –> charge low price
