Oligopoly Essay Flashcards
Introduce the Market Structure of UK Banking
The UK Banking Industry can be characterised as an oligopoly. An oligopoly is a market structure in which an industry is dominated by a small number of powers who possess the majority share of market power, known as the concentration ratio. This is evident in the UK banking industry as firms such as HSBC, Lloyds, RBS, Barclays, and others possess a high concentration ratio in the banking industry in the UK.
Discuss the characteristics of Oligopolies in UK Banking
Other characteristics include high barriers to entry, similar to that of monopolies. This is evident in the UK banking industry as it is very difficult for new firms to enter this market, due to licensure laws, capital requirements and access to financing. Interdependence of firms occurs in an oligopoly as firms often make choices based on their rivals. This is evident in the UK banking industry as each firm is often affected by the action of rivals. Lastly, in an oligopoly, firms have some control over prices. However, decisions regarding price are often made following rival action, as previously discussed.
What happens in an Oligopoly to prices?
Prices in an oligopoly tend to be “rigidity”, which means firms often stick to the same prices over long periods of time. This is evident and can be explained through the Kinked Demand Model.
Discuss the Kinked Demand Curve
As is evident in the graph, firms often behave in a two-fold manner in reaction to a price change by a rival firm. Simply, firms follow price reductions by rivals but not price increases. Therefore, the market share of the firm reduces significantly as a result of the price rise. Conversely, if a seller reduces prices, then the rivals follow suit to even it out. This prevents their market share from falling. Once the rivals react, the firm lowering the price first cannot gain from the price cut.
Conclude Price Rigidity
As explained above, a firm cannot gain or lose by changing its price from the prevailing price in the market. In both cases, there is no increase in demand for the firm which changes its price. Hence, firms stick to the same price over time leading to price rigidity under oligopoly.
