oligopoly : price and non price competition Flashcards
what is non price competition in oligopoly?
the focus on competition is on product differentiation
-high levels of spending on advertising
-branding
-packaging
-loyalty cards
price competition in oligopolies ?
less common as firms want to avoid price wars(A situation where rival businesses continuously lower prices their services as a competitive response)
Individual firms will take into account the likely reactions of their competitors
This mutual interdependence leads to price stability or rigidity within the market
The kinked demand curve demonstrates the concept of price rigidity
what does the kinked demand curve show?
shows why prices are stable in oligopolistic competition
kinked curve diagram analysis
if a firm increases their price from p1 to p2 , it is unlikely that rival firms will follow the price increase
The firm will lose consumers to rival firms if they charge a higher price
This means that a small increase in price leads to a greater than proportionate decrease in quantity demanded, resulting in an overall fall in market share and total revenue
However
if a firm decreases its price from p1 to p3 it is likely that rival firms will respond by also decreasing price
All firms in the market will offer the new lower price
Market share remains the same. However, total revenue and profit decline for all
This means that a decrease in price leads to a less than proportionate increase in quantity demanded, resulting in an overall fall in total revenue
the change in elasticities , bring about a kink in the demand curve at PL p1 - this creates price rigidity,as firms tend not to change price due to the anticipated behaviour of competitors (mutual interdependence)
what do oligopolies do to avoid price wars ?
firms focus on non-price competition strategies to increase sales
This is why there is a high level of expenditure on research and advertising in oligopolistic industries
what are the reasons for non price competition in oligopolies?
price leadership -A dominant firm in the industry is usually the price leader. Other smaller firms typically set a price close to it
price agreements -Firms may engage in price fixing to keep prices high
price wars -This occurs when competitors repeatedly lower prices to undercut each other in an attempt to gain or increase market share
By focusing on non-price strategies such as product differentiation or branding, firms can reduce the risk of engaging in price wars
barriers to entry-Firms develop their advertising and branding as it increases barriers to entry
New firms then find it difficult to compete with goods that have established brand loyalty with consumers
what are the advantages of oligopolies ?
-Consumers may benefit with lower prices. With a few firms dominating the market, large-scale operations result in economies of scale, reducing average cost
-Lower costs enable firms to generate supernormal profits, which can be reinvested in research and development to create more innovative goods/services for consumers
-A high degree of competition gives firms an incentive to continuously strive to improve the quality of goods and services
what are the disadvantages of oligopolies?
-High barriers to entry restrict the number of firms entering the market
Fewer firms may result in less innovation of goods and services
-The dominance of a few firms enables control over prices or output. Limited competition results in fewer choices for consumers
-High levels of spending on branding and advertising can increase production costs. This cost may be passed on to consumers through higher prices
characteristics of a monopoly?
-market structure in which there is a single seller
-There are no substitute products
-complete market power (able to set prices and control output) his allows the firm to maximise supernormal profit in the short-run
There is no long-run erosion of supernormal profit as competitors are unable to enter the industry
High barriers to entry -to prevent any competition from entering the market e.g by purchasing companies that may be a threat
is a monopoly a price maker or taker?
price maker - able to manipulate prices in order to change demand
meant the revenue curve is sloping downwards
where does a monopoly produce in oder to profit maximise ?
where marginal cost = marginal revenue
advantages of a monopoly on a firm?
-supernormal profits
-global competitiveness
-economies of scale can increase reduce average cost
-producer surplus increases(the difference of the price the producer is willing to sell produce and what they actually receive for the product
-price discrimination - where the firm charges different customer different prices for the same profit
what are the advantages of a monopoly o n employees ?
supernormal profits result in higher wages
what are the advantages of a monopoly on a consumer ?
-Product innovation due to the firm’s supernormal profits may result in a better-quality product
-cross subsidisation (using the profits generated by one product to lower the price of another)can lower prices on some products that firm provides
-prices may fall
what are the advantages of a monopoly on a supplier?
increased sale volume as they are able to supply products that are distributed nationally or internationally
