Oligopoly

Question 1

Define oligopoly?

Answer 1

A market structure with few sellers, in which each firm must take into account the behaviour and likely behaviour of rival firms in the industry

Question 2

whats game theory??

Answer 2

a method of modelling the strategic interactions between firms in an oligopoly

Question 3

what is dominant strategy??

Answer 3

a situation in game theory where a firms best strategy is independent of those chosen by others

Question 4

What is Nash equilibrium??

Answer 4

situation occurring within a game when each players chosen strategy maximised payoffs given the other players choice, so no need to alter behaviour

Question 5

Whats a cartel

Answer 5

an agreement between firms on price or output with the intention of maximising their joint profits

Question 6

what is tacit collusion

Answer 6

a situation occurring where firms refrain from competing on price, but without communication or formal agreement between them

Question 7

Examples of oligopoly markets/ industries

Answer 7

entertainment industry, mobile network operators, car manufacturers, supermarkets

Question 8

What are the characteristics of oligopoly?

Answer 8

1) few large firms
- 2) high barriers to entry
3) non price competition (product differentiation)
4) price makers
5) interdependent decision making

Question 9

What examples of non price competition are there?

Answer 9

• exclusivity
• brand loyalty
• loyalty schemes
• innovation
• free upgrades
• customer service
• convenience
• sales promotion

Question 10

What does the kinked demand curve look like??

Answer 10

AR= 1st half elastic, 2nd half inelastic
MR= first half elastic, then vertical, then second half inelastic
-MC crosses MR at vertical point
-price is at the top of the vertical point

Question 11

What does the kinked demand curve model and how??

Answer 11

• models the behaviour of firms trying to anticipate their rivals behaviour
• the elastic part means that one firm putting up prices won’t result in other firms following because they want to retain their market share, whilst the firm increasing prices will see a loss in profit and market share
• the inelastic part means that one firm lowering prices lowers total revenue as other firms copy to retain competitiveness and their market share
• the AC curve going through the vertical part of the MR curve means that profits can rely massively on their average costs, and there is incentive to lower average costs through exploitation of economies of scale

Question 12

Why do oligopolies have to compete in non price ways

Answer 12

they can’t compete in price by lowering prices because it reduces overall revenue and forces them onto inelastic part of demand curve

Question 13

What is collusion and when is collusion most likely??

Answer 13

collusion can be formal or tacit, and occurs when firms co-operate with each other on price or output against the interests of consumers
-most likely when oligopolistic conditions are stronger

Question 14

What competition and when is it most likely to occur?

Answer 14

Price competition occurs when there are relatively large number of firms and lower barriers to entry than an oligopoly so they are better able to compete on price

Question 15

How can game theory explain whether competition or Colluding between two firms will benefit them both??

Answer 15

• if both firms choose to collude and keep prices high then their revenue may be maximised
• however the firms both have the incentive to undercut their competition and increase their own revenue at the expense of the competitors. therefore if they both compete to undercut each other, both of their revenue falls
• if one firm competes and one firm colludes, the competing firm is better off with lower prices and more revenue than the colluding firm

Question 16

Advantages and disadvantages of oligopoly

Answer 16

ADV-

• could be dynamically efficient and reinvest profits into better products for consumers
• due to low firms in the market and high barriers to entry, economies of scale are better exploitable than in a more competitive market
• price stability and profits disciplines firms to Lower costs, reducing chances of x inefficiency and moving towards productive efficiency (which they won’t achieve)

DIS ADV

• colluding oligopolies raise the prices and go against the interests of the consumer, reducing their utility
• lack of competition pressure may reduce their incentive to reinvest into R+D
• could be x inefficient if they don’t decide to reduce stock levels or overstaffing, leading to higher prices

Question 17

How is oligopoly better and worse than monopoly??

Answer 17

better- more competitive means lower prices and more choice

worse- less opportunity to benefit from dynamic efficiency due to lower SNP and economies of scale

Question 18

How is oligopoly better and worse than monopolistic competition??

Answer 18

better- more chance of economies of scale and achieving dynamic efficiency in the long run
worse- collusive oligopolies could lead to higher prices whereas competition incentivises price and non price competition