Oligopoly and Monopoly

Question 1

Characteristics of an oligopoly

Answer 1

-few dominant sellers
-interdependence
-price makers
-differentiated
-high barriers to entry

Question 2

What is N-firm concentration ratio

Answer 2

The total combined market share of the largest N firms in a market

Question 3

What is the equation for N-firm concentration ratio

Answer 3

(total sales of N firms/total market sales)x100

Question 4

Define collusion

Answer 4

Collusion is when firms make collective agreements that reduce competition.

Question 5

Conditions for collusion

Answer 5

-Maximise joint profits
-high barriers to entry
-prevent cheating

Question 6

Name and explain the different types of collusion

Answer 6

Tacit:
-when firms collude after an unwritten and informal agreement

Overt:
-when firms collude after an written and formal agreement

Question 7

Describe Game theory

Answer 7

-the strategic behaviour of firms in an oligopoly

-the actions of one party will have consequences which will directly affect another party

-interdependence

Question 8

What is the dominant strategy and Nash equilibrium

Answer 8

The dominant strategy is when one party chooses the option that most benefits them regardless of the other party’s response

The Nash Equilibrium is when both parties pick their dominant strategy

Question 9

Name and describe the 3 types of price competition

Answer 9

Price wars:
-the repeated undercutting of prices
-losses in the long run

Predatory pricing:
-when firms set their prices below their own AVC
-making a loss in the short run
- force out current competition

Limit Pricing:
-when incumbent firms set prices low enough to deter any firms from joining
-high enough to make normal profit

Question 10

Types of non-price competition

Answer 10

-Advertisement
-Loyalty schemes
-Branding
-Quality
-Customer Service

Question 11

Advantages and disadvantages of an oligopoly

Answer 11

Advantages:
-dynamically efficient
-economies of scale (technical, financial)

Disadvantages:
-productively, allocatively and X-inefficient
-lack of consumer choice
-risk of collusion
-low levels of competition

Question 12

Characteristics of a monopoly (also mention the legal monopoly)

Answer 12

-one dominant seller in the market
-more than 25% of the market share
-high barriers to entry

Question 13

Go on sketchpad and draw the long run profit maximising for a monopoly

Answer 13

Did you remember:
-MC=MR
-Supernormal profits

Question 14

Describe third degree price discrimination

Answer 14

When firms charge different customers prices based on different PEDs

Question 15

Advantages and disadvantages of 3rd degree price discrimination

Answer 15

Advantages:
-increased profits
-lower price

Disadvantages:
-higher prices for consumers

Question 16

What is a natural monopoly

Answer 16

When it is most efficient for there to be one firm in the market due to very high fixed costs and opportunity economies of scale.

Question 17

Costs and benefits of natural monopoly for firm

Answer 17

Benefits:
-large profits
-economies of scale

Costs:
-x-inefficiency

Question 18

Advantages and disadvantages of monopoly

Answer 18

Advantages:
-dynamically efficient
-economies of scale (technical, financial)
-cross-subsidisation

Disadvantages:
-productively, X and allocatively inefficient
-high prices due to lack of competition
-risk of diseconomies of scale
-lack of choice for consumers

Question 19

Benefits of a natural monopoly

Answer 19

-Very high supernormal profits
-Very high economies of scale could allow prices to be lower
-Increased finances available for Research and Development
-Dynamic efficiency and technical economies of scale

Question 20

Drawbacks of a natural monopoly

Answer 20

-Less choice for consumers
-Lack of competition may lead to productive and X-inefficiency