Oligopoly and Monopoly Flashcards
Characteristics of an oligopoly
-few dominant sellers
-interdependence
-price makers
-differentiated
-high barriers to entry
What is N-firm concentration ratio
The total combined market share of the largest N firms in a market
What is the equation for N-firm concentration ratio
(total sales of N firms/total market sales)x100
Define collusion
Collusion is when firms make collective agreements that reduce competition.
Conditions for collusion
-Maximise joint profits
-high barriers to entry
-prevent cheating
Name and explain the different types of collusion
Tacit:
-when firms collude after an unwritten and informal agreement
Overt:
-when firms collude after an written and formal agreement
Describe Game theory
-the strategic behaviour of firms in an oligopoly
-the actions of one party will have consequences which will directly affect another party
-interdependence
What is the dominant strategy and Nash equilibrium
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
Name and describe the 3 types of price competition
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
Types of non-price competition
-Advertisement
-Loyalty schemes
-Branding
-Quality
-Customer Service
Advantages and disadvantages of an oligopoly
Advantages:
-dynamically efficient
-economies of scale (technical, financial,purchasing)
-Price Stability Benefits Consumers and Firms
Due to mutual interdependence, firms may avoid price wars.
→ This results in stable prices, often explained by the kinked demand curve theory.
→ Consumers benefit from predictable pricing, and firms enjoy revenue certainty.
→ This aids long-term planning and investment.
-Greater Consumer Choice Through Non-Price Competition
To avoid price wars, oligopolies often compete using branding, quality, after-sales service, etc.
→ This leads to product differentiation, giving consumers more variety.
→ E.g., different car brands or mobile phone models.
→ Consumers benefit from customised products and enhanced satisfaction.
Disadvantages:
-productively, allocatively and X-inefficient
-lack of consumer choice
-risk of collusion-higher prices
-High barriers to entry limits new competition
-Wasted Spending on Advertising
-Firms spend massively on branding, which doesn’t always improve product quality.
Characteristics of a monopoly (also mention the legal monopoly)
-one dominant seller in the market
-more than 25% of the market share
-high barriers to entry
Go on sketchpad and draw the long run profit maximising for a monopoly
Did you remember:
-MC=MR
-Supernormal profits
Describe third degree price discrimination
When firms charge different customers prices based on different PEDs
Advantages and disadvantages of 3rd degree price discrimination
Advantages:
-increased profits
-lower price
1.Enables Access for Lower-Income Groups
Firms can offer discounts to students, pensioners, or low-income consumers.
→ These consumers may not have been able to afford the product at a uniform price.
→ This improves accessibility and may reduce inequality in essential services (e.g., healthcare or education).
2.Increases Firm Revenue and Profit
By charging each group the maximum they’re willing to pay, firms convert consumer surplus into producer surplus.
→ This increases overall revenue and profitability, especially in monopolistic or oligopolistic markets.
→ Higher profits can be used to sustain operations or fund investment.
3.Potential for Dynamic Efficiency
With higher profits from discrimination, firms can reinvest in R&D, service improvements, or new technologies.
→ This boosts dynamic efficiency, leading to long-term benefits for consumers and firms alike.
Disadvantages:
-higher prices for consumers
1.Can Be Perceived as Unfair or Exploitative
Some consumers may feel penalised for their identity (e.g., living in London or having less price flexibility).
→ This perception of inequity can harm firm reputation or provoke political intervention.
2.Allocative Inefficiency in Sub-markets
In some segments, P > MC because price is based on willingness to pay, not cost.
→ Consumers may be priced out of buying even when their valuation exceeds the marginal cost.
→ This causes allocative inefficiency and reduces total welfare.
3.Consumer Surplus is Eroded
Instead of benefiting from a lower price, consumers pay closer to their maximum willingness to pay.
→ More consumer surplus is converted into producer surplus.
→ This reduces consumer welfare, especially in inelastic sub-markets.
Time consuming and costly to get information on each consumers PED
What is a natural monopoly
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.
Advantages and Disadvantages of natural monopoly for firm and consumers
Benefits:
-large profits
-economies of scale
-Improved allocative efficiency
-Consistent quality and standards for consumers
-Cross-subsidisation Improves Equity
A natural monopoly can use profits from profitable regions or customer groups to subsidise less profitable ones.
→ E.g., rural broadband or postal services.
→ This improves accessibility and supports social equity, helping meet merit good or public service objectives.
- Stable and Predictable Supply
A single firm operating without fear of competition can plan long-term.
→ This improves investment certainty, especially in infrastructure-heavy industries.
→ Reliability and continuity of service (e.g., electricity grid) is better ensured.
Costs:
-productively and X inefficient due to lessened incentive to keep costs low due to lack of competition
-Potential for Consumer Exploitation
If not regulated effectively, a natural monopoly can charge excessive prices or cut service quality.
→ Consumers may be left with no alternative supplier, especially in essential services.
→ This can lower consumer welfare and raise equity concerns.
- Lack of Innovation or Dynamic Efficiency
With no competition, the monopoly has less incentive to innovate or improve quality.
→ Supernormal profits may not be reinvested into R&D or service upgrades.
→ Over time, this harms dynamic efficiency and reduces long-term consumer benefits.
-Less choice for consumers
-Lack of competition could lead to worsened customer service
Advantages and disadvantages of monopoly
Advantages:
-dynamically efficient (→ These can be used to fund innovation, R&D, and technological advancements.
→ Over time, this could improve product quality and reduce long-run costs.)
-economies of scale (technical, financial)
-cross-subsidisation (Profits from one area can fund cheaper services elsewhere.)
Disadvantages:
-productively and X inefficient due to lessened incentive to keep costs low due to lack of competition
-high prices due to lack of competition,allocative inefficiency
-risk of diseconomies of scale
-lack of choice for consumers (As a sole provider, monopolies restrict variety and innovation in the short run.
→ Consumers must accept the product on offer, even if it doesn’t suit their needs.
→ This reduces consumer sovereignty.)
