oligopoly (L13)

Question 1

how can you look at how close a particular market is to being a monopoly?

Answer 1

examine the degree of concentration in the market

Question 2

how is concentration measured

Answer 2

concentration ratio which measures the market share of the largest fixed no of firms in the market (eg 3 firm concentration measures 3 largest)

Question 3

in what ways can concentration be measured

Answer 3

employment (proportion of workers in the industry) or largest markets, on shares in output or shares in employment

Question 4

why may measures of shares in output differ to shares in employment?

Answer 4

larger firms may use capital intensive methods so their share of employment would be lower than share of output

Question 5

cooperative oligopoly leads to..

Answer 5

monopoly end of the spectrum

Question 6

non-cooperative oligopoly leads to…

Answer 6

competitive end of the spectrum

Question 7

when is an oligopoly likely to develop

Answer 7

modest economies of scale- not enough for a natural monopoly but large enough to make it hard for too many firms to operate at minimum efficiency

Question 8

characteristics of oligopoly

Answer 8

small number of large firms
high barriers to entry(patents, control of natural resources, start up costs)
differentiated/homogeneous eg cereal/oil
mutual interdependence(decision of one firm affects another)

Question 9

what implications does mutual interdependence have for the behavior of oligopolistic firms

Answer 9

strategic behaviour- based on plans accounting rivals possible courses of action to formulate own strategy
conflicting incentives-to collude and compete

Question 10

what are the conflicting incentives in oligopolys

Answer 10

to collude- agreement to limit competition between them usually by fixing prices to lower quantity produced. Limits comp, reduces uncertainty.
to compete-trying to capture a portion of its rivals market shares and profits

Question 11

whose work is game theory based on

Answer 11

John F.Nash

Question 12

what is game theory?

Answer 12

illustrates prisoner’s dilemma- 2 rational decision makers who use strategic behaviour to maximise profit by guessing rivals behaviour may end up collectively worse off (nash equilibrium is the final position)

Question 13

what does nash equilibrium show?

Answer 13

conflict between pursuit of individual self interest and collective firm interest sometimes

Question 14

collusive oligopoly

Answer 14

agreement to limit comp, increase monopoly power, increase profit

Question 15

common forms of collusion

Answer 15

price fixing agreements (holding price constant/raising price by fixed amount/fixing price differences)

Question 16

cartel

Answer 16

formal agreement to take actions to limit comp and increase profits (open/formal collusion) can be done by limits to output produced, restricting advertising etc, agreeing to set up barriers to entry
collectively behave like a monopoly

Question 17

example of cartel

Answer 17

OPEC (org of petroleum exporting countries) w 13 oil producing countries eg Iran, tries to periodically raise world price of oil by cutting back total ouput. each member=assigned an output level (quota) that it can produce.

Question 18

what factors make it difficult for a cartel to be established and maintained?

Answer 18

incentive to cheat
cost diff between firms
number of firms
possibility of price war 
recessions
potential entry into industry 
lacking dominant firm 
PRICEND

Question 19

cost diff between firms

Answer 19

each firm faces different costs and cost curves, firms with higher ac have lower profits and lower ac have higher profits so its hard to agree on common prices, different demand curves bc of market share and product differentiation

Question 20

incentive to cheat

Answer 20

secretly lower prices for some buyers to increase market share and profit but if they’re discovered, the cartel is in danger of collapsing

Question 21

number of firms

Answer 21

larger number of firms = harder to agree on price and allocation of output as there are more views and compromise is harder to achieve

Question 22

possibility of a price war

Answer 22

cheating=retaliatory price cuts=price war= collectively worse off

Question 23

recessions

Answer 23

sales + profit fall=stronger incentive to lower prices and cheat

Question 24

potential entry into the industry

Answer 24

profits encourage entry of new firms increasing supply and lower price which lowers the cartels profits, cartels long run survival depends on high barriers to entry

Question 25

lacking dominant firm

Answer 25

its presence helps reach agreement as the firm assumes leadership position- dominant member of OPEC is Saudi Arabia

Question 26

tacit collusion

Answer 26

informal, cooperation thats implied by the firms without a formal agreement to coordinate prices, avoid competitive price cutting, limit competition, reduce uncertanties and increase profits

Question 27

examples of informal collusion

Answer 27

price leadership, dominant firm in the industry sets a price and initiates price changes and the remaining firms become price takers, but they can still compete with non price tactics
prices changes aren’t frequent and are undertaken by the leader when cost changes occur
limit pricing

Question 28

examples of industries that followed the price leadership model

Answer 28

US steel, Kellog’s

Question 29

obstacles of sustained price leadership

Answer 29

cost differences makes it hard to follow the leader- if the leader initiates a price increase and it isn’t followed, it would risk losing market share and sales
incentive to cheat
profit attracts new entrants which cuts into market shares and profits

Question 30

limit pricing

Answer 30

firms informally agree to set a price lower than the profit maximising price to discourage new firms entering the industry which would mean they sacrifice some of their profits