Oligopoly Flashcards
assumptions under oligopoly
- there is a small number of large firms, who have a high concentration ratio eg 4 major retail banks
- firms interact with one another, they are interdependent and aware of reactions from competitors
- all firms produce goods that are close substitutes for one another
- product differentiation and competitive advertising occurs
- avoid price competition - prices tend to be rigid or sticky, instead use non price competition
- there are barriers to entry into the industry
- aim for profit maximisation, but often have other objectives also
- collusion occurs
collusion
any action undertaken by rival firms to restrict competition between them with a view of increasing their respective profits
price competition
firms compete by changing their prices
non price competition
when competing firms try to increase sales/market share by methods other than increasing prices
eg:
-branding to create loyalty and recognition
-packaging to make distinctive
-extended opening hours eg 24/7
-special offers
why do consumers prefer price competition
- leads to cheaper prices for consumers
- the extras included in non-price comp. cause price to go up, decreasing the consumers real income
- consumers frequently don’t need the offers
- consumers frequently never cash in coupons received, therefore paying for something they never use
benefits of non-price competition
- stability in prices
- better quality as firms compete in quality instead of price
- consumers receive the benefit of advertising ie sponsorship
- consumers are more informed due to extensive advertising
- consumer loyalty is rewarded eg loyalty cards
barriers to entry
existing firms may:
- already have the adv. of economies of scale
- practice limit pricing: strategy of setting low prices so that it is impossible and unprofitable for new firms to enter the market
- control the channels of distribution
- practice brand proliferation: sell several brands of the same product to have control over the market eg Gillette and Wilkinson Sword are the same brand, selling razors
forms of collusion
explicit - joint decisions in an arrangement known as a cartel
implicit - no formal agreement but may be eg reluctance to engage in a price war
examples of collusion
price fixing
limit pricing
agreement to limit supply
price fixing
agreement between firms not to compete with each other on a price basis
limit pricing
setting the price so low that potential new firms are discouraged from entering the market
agreement to limit supply
keep down supply and thus keep up price
eg Organisation of Petroleum Exporting Countries
revenue curve: Sweezy model for decreasing prices
an oligopolist faces an inelastic revenue curve for decreasing prices because:
firms interact with each other.
if one firms lowers its price, then all the others, to protect their market share, will do the same.
so no firm will gain any significant extra market share
revenue curve: Sweezy model for increasing prices
an oligopolist faces an elastic revenue curve for increasing prices because:
all firms goods are close substitutes
if one firm ups its price, its customers will switch to a cheaper substitute, and the firm will lose a significant share of the market
price consistency: the vertical section of the MR curve
firms in oligopoly are reluctant to change their prices, as the incurred costs in doing so outweigh the profits
eg argos printing new catalogues
