Oligopoly (T.O.T.F)

Question 1

What is the definition of an oligopoly

Answer 1

A small number of of firms each with a degree of market power (ability to influence price and quantity)

Question 2

What type of profit do oligopoly firms make in the long run

Answer 2

Supernormal profit

Question 3

Why do firms in oligopoly make supernormal profit in the long run

Answer 3

Strong barriers to entry

Question 4

Give 3 examples of oligopoly markets

Answer 4

Supermarkets
Banks
Network providers

Question 5

How can we measure oligopoly power

Answer 5

Using concentration ratios which includes adding up the market share of the biggest firms

Question 6

Oligopoly firms are characterised by interdependence, what does this mean?

Answer 6

This means that firms must consider the reactions of competitors to their strategic decisions and how they might have to react to decisions by other firms

Question 7

What are the two strategic decisions which can be taken by oligopoly firms

Answer 7

Collude or Compete

Question 8

What does competing usually mean for oligopoly firms

Answer 8

A price war

Question 9

Why is a price war bad for oligopoly firms

Answer 9

A price decrease initiated by a single firm is matched by all firms and therefore all firms make less profit

Question 10

In what scenario is competing strategically effective for oligopoly firms

Answer 10

Competing is only effective if it results in firms permanently increasing their market share at the expense of rivals

Question 11

During oligopoly competition, what are the two ways that a firm may permanently increase its market share at the expense of rivals

Answer 11

• A competitor may leave a market
• Consumers may permanently switch brand loyalty

Question 12

What are two types of collusion

Answer 12

Explicit
Implicit

Question 13

How does explicit collusion arise

Answer 13

By firms forming a cartel

Question 14

Draw the diagram showing explicit collusion

Answer 14

in notes

Question 15

Explain how explicit collusion works

Answer 15

• Each firm is given a quota
• By sticking to the quota, the profit max price is able to be charged (MC=MR)
  -Each firm then makes supernormal profit

Question 16

What do the total quotas of all firms within a cartel add up to

Answer 16

Total output in the market

Question 17

Why do most cartels fail

Answer 17

Due to cheating

Question 18

What is cheating within a cartel

Answer 18

If an individual body decides to produce more than its quota

Question 19

How are cartels often caught

Answer 19

Due to whistleblowers who inform the CMA, incriminating other firms in return for immunity

Question 19

Why does cheating lead to failure within a cartel

Answer 19

When an individual body produces more than its quota, the total the bodies produce more which means supply increases and therefore price decreases, leading to less profit

Question 19

Who are the CMA

Answer 19

Competition and markets authority

Question 19

What is the price leadership model

Answer 19

Involves one firm in the industry choosing to act as a price leader - one firm chooses to raise prices in the expectation that others will follow suit

Question 20

What is implicit collusion

Answer 20

When firms in oligopoly follow the price leadership model

Question 21

When do profits rise when following the price leadership model in implicit collusion

Answer 21

When prices rise, and as demand overall is inelastic, revenues and profits will rise

Question 22

What happens if other firms dont follow suit when a firm raises its prices

Answer 22

The original ‘mover’ will lower prices back in line with the others in the market

Question 23

When is price leadership more successful

Answer 23

1- There is a way of indirectly communicating the price to other firms in the market
2- The product is more homogeneous

Question 24

Give examples non price competition

Answer 24

Advertising
Brand loyalty
Quality

Question 25

When do firms engage in non-price competition

Answer 25

When they do not have the ability/option to collude and they might think that a price war is unwinnable

Question 26

What does the kinked demand curve represent?

Answer 26

Price stability in oligopoly markets

Question 27

Draw the kinked demand curve (basic)

Answer 27

Notes

Question 28

What does the kinked demand curve show

Answer 28

Shows how both a price increase and decrease leads to worse outcomes for the firm

Question 29

From the kinked demand curve, what does a rise in price by a firm show

Answer 29

It shows that a rise in price results in elastic demand (a more than proportional fall in quantity)

Question 30

From the kinked demand curve, what does a fall in price by a firm show

Answer 30

Shows that a fall in price by one firm leads to inelastic demand (a less than proportional increase in quantity)

Question 31

Draw the more complex version of the kinked demand curve

Answer 31

Notes