Oligopoly Flashcards
Oligopoly
Oligopoly is a market structure where there is a small number of firms in the industry and where each firm is interdependent with one another, creating uncertainty. Barriers to entry are also likely to exist.
Key characteristics of an oligopolistic market structure
Supply in the industry must be concentrated, eg 3 firms hold 80% of market share.
Firms must be interdependent.
Collusion
When firms make agreements amongst themselves so as to restrict competition and maximise their own benefits.
In an oligopoly, this is known as a collusive oligopoly.
Overt/Formal Collusion
When firms make agreements amongst themselves to restrict competition, typically by decreasing output, increasing prices and keeping potential competitors out of the market.
Cartel
An overt/formal agreement between firms to limit competition in the market, for example, by limiting output to increase prices.
Covert collusion
Where the dominant firms in the market secretively corporate and make formal agreements in attempt to prevent suspicion of anti-competitive behaviour. But the firms still aim to achieve joint-profit maximisation.
Tacit/Informed collusion
A form of collusion where no agreements are made, but where firms act together to minimize a response and others follow suit of that dominant firms (eg. price leadership). If a collusion is tacit there will be no evidence of communication.
Game Theory
Game theory is an analysis of outcomes in which 2 players (firms) are interdependent. Eg the prisoners dilemma.
Prisoners Dilemma
The prisoners dilemma is when one player does not know the strategy of the other player, and the optimum strategy of one firm leads to a worse outcome if they had known the strategy of another.
Price Competition examples
Price War - A situation where several firms in a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share.
Predatory Pricing - When an established firm in a market is threatened by a new entrant, they lower prices so the newer entrant is unable to make profit. This drives out new entrants, and the firm can put prices back up.
Limit Pricing - When firms set a low enough price (the limit price) to deter new entrants from coming into the market.
Price Stability in an oligopolistic market diagram
https://bit.ly/2sr0G6F
Uses the kinked demand curve
Non-Price Competition examples
Price is not always important in an imperfectly competitive market, some use the marketing mix (4Ps) instead to compete.
Predatory Pricing
When an established firm in a market is threatened by a new entrant, they decrease prices so the new entrant is unable to make profit. This drives out new entrants, and the firm can put prices back up.
Limit Pricing
When firms set a low enough price (the limit price) to deter new entrants from coming into the market.
