Oligopoly Flashcards
Define oligopoly
A few large firms that have the majority of the market share
What are the features of an oligopoly?
Supply in the industry concentrated in the hands of relatively few firms
Firms must be interdependent-actions from one firm will have an affect on the sales and revenues of other firms
High barriers to entry
Nonprice competition
Define concentration ratio
A ratio which indicates the total market share of a number of leading firms in the market, or the output of these firms as a percentage of total market output
Define price rigidity
Sticky prices, irrational to increase or decrease price
Why is it irrational for a firm to increase their price?
Quantity sold will fall by more than proportional-Substitutes available
Why is it a irational for a firm to decrease their price?
Less than proportionate rising quantity sold-loss of profit
Define collusion
Firms agree illegally to set prices together. No need for competition however it is illegal, it’s consumer financially and reduces innovation as there is no incentive
Why might firms collude?
Because they can exploit their customers with high prices and increase their profit margins
What are ways to stop collusion?
Take advantage of independence, whistleblower, broad firms with no legal action
Regulations and inspections
Introduce a price ceiling
What is the government perspective and oligopolies?
No need to lower barriers of entry to let firms in as it may not be efficient because the large firms benefit from economies of scale
Why is it hard to find collusion?
Easy to argue that it is sticky prices
Easy to argue that it is price leadership
Easy to argue that it is market corporation
Is all collusion bad?
No
Consumers may benefit from stable prices
Is the allocative efficiency in oligopoly?
Probably not
A dominating firm has price making ability
Is there a productive efficiency in oligopoly
Probably not
There is supernormal profit
