Oligopoly Flashcards
oligopoly
A market structure where a few large firms dominate the market
features of an oligopoly
firms are large enough to ensure that one firm’s actions affects other firms = interdependent
Because of this interdependency, their interactions are characterised by strategic games
- Decisions of one firm are influenced by the most likely market response of their competitors
- Oligopolies are like a tennis match where each player’s action depends on what their opponent does
examples of oligopolies
Domestic airline industry
Car manufacturing industry
Steel manufacturing industry
Oil industry
Banking and finance industry
Supermarkets
Soft drink industry
Breakfast cereal industry
Tobacco industry
Universities
Number of Sellers
Industries which operate with only two large firms
Industries which operate with three, four or five large firms
Industries which operate with a small number of large dominant firms and lots of smaller “fringe” firms
Type of Products
Oligopolies can have either homogeneous or differentiated products, but all are highly substitutable
Barriers to Entry
economies of scale
ownership of a key input
government-imposed barriers
incumbent firm dominance, people trust them
analysis
As firms in an oligopoly industry are interdependent, analysing their behaviour is complicated
To analyse oligopolies, we need to look at the unique structure of each individual industry
- size of the market, number and concentration of firms, degree of interdependence and significance of barriers to entry to the market
Game theory
a framework for understanding the behaviour of interdependent agents and the use of strategy in these interdependent games
game theory is key to understanding the behaviour of oligopolistic firms
price
If firms in an oligopoly market engage in either implicit or explicit collusion, industry output is lower and price is higher compared to firms in a perfectly competitive market
- this would decrease consumer surplus
If price wars occur in oligopoly markets then prices could be temporarily lower than in perfectly competitive markets
- this would increase consumer surplus
profit
Firms in an oligopoly have the ability to make long-run economic profits as they have barriers to entry
allocative efficiency
Efficient resource allocation requires the marginal
benefit to the consumer to be equal to the marginal cost, so we are back to the question of price
Productive efficiency
Unless economies of scale is a key aspect of an oligopoly there is no specific reason why we would expect firms to operate at or close to the minimum efficient scale
Dynamic efficiency
Oligopolistic firms often have strong incentives to innovate to stay ahead of the competition
They are also better placed to build up the capital required to invest in R&D
