Oligopoly pt2

Question 1

Why is there a kinked demand curve

Answer 1

Because the price elasticity of demand may depend on the likely reaction of rivals to changes in one firm’s price and output.

Question 2

Kinked demand curve explained

Answer 2

Rivals are assumed not to follow a price increase of firm but to match a price fall of a firm. Therefore there is little incentive for any firm to change their price although they have price setting power as it can lead to a fall in total revenue so prices remain stable even with cost changes. This can be shown with the kinked demand curve.

Question 3

Examples of non price competition

Answer 3

-Innovation
-Branding
-Sales promotion
-Free product upgrades
-Exclusivity/Loyalty schemes

Question 4

Winners of price wars

Answer 4

-Regular consumers-
Lower prices
-Managers-higher sales

Question 5

Losers of price wars

Answer 5

-Shareholders-lower profits
-Suppliers-squeezed for lower prices which eats into their profits

Question 6

Collusive behaviour

Answer 6

Collusion is a form of anti competitive behaviour that can be horizontal, vertical, explicit or tacit. Collusion can also be legal

Question 7

Legal collusion

Answer 7

Practices arent prohibited if the respective agreements contribute to the improvement of production or distribution of goods or promoting technical progress in a market

Question 9

3 Key aims of business collusion

Answer 9

-To maximise joint profits
-Collusion lowers the cost of competition e.g. wasteful marketing wars costing millions
-Causes higher profits and increased producer surplus/shareholder value, leading to higher share prices

Question 10

Price fixing (collusion) is easier when:

Answer 10

-Industry regulators are weak
-Penalties for collusion are relatively low compared to potential gain
-Participating firms have a high % of total sales which-they control the market supply
-Firms communicate well and trust each other
-Strong brands so consumers dont switch demand when collusion raises the price