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Economics (MICRO) > Oligopoly (T.O.T.F) > Flashcards

Oligopoly (T.O.T.F) Flashcards

1
Q

What is the definition of an oligopoly market

A

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

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2
Q

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

A

Supernormal profit

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3
Q

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

A

Strong barriers to entry

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4
Q

Give 3 examples of oligopoly markets

A

Supermarkets
Banks
Network providers

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5
Q

How can we measure oligopoly power

A

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

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6
Q

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

A

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

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7
Q

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

A

Collude or Compete

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8
Q

What does competing usually mean for oligopoly firms

A

A price war

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9
Q

Why is a price war bad for oligopoly firms

A

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

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10
Q

In what scenario is competing strategically effective for oligopoly firms

A

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

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11
Q

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

A
  • A competitor may leave a market
  • Consumers may permanently switch brand loyalty
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12
Q

What are two types of collusion

A

Explicit
Implicit

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13
Q

How does explicit collusion arise

A

By firms forming a cartel

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14
Q

Draw the diagram showing explicit collusion

A

Each firm given a quota (O-Qquota)
All quotas added together for individual firms equal total output (O-Q)
By sticking to quota price O0 is able to be charged and each firm makes supernormal profit

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15
Q

Explain how explicit collusion works

A
  • 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
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16
Q

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

A

Total output in the market

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17
Q

Why do most cartels fail

A

Due to cheating

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18
Q

What is cheating within a cartel

A

If an individual body decides to produce more than its quota

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19
Q

How are cartels often caught

A

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

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19
Q

Why does cheating lead to failure within a cartel

A

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

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19
Q

Who are the CMA

A

Competition and markets authority

19
Q

What is the price leadership model

A

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

20
Q

What is implicit collusion

A

When firms in oligopoly follow the price leadership model

21
Q

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

A

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

22
Q

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

A

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

23
Q

When is price leadership more successful

A

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

24
Q

Give examples non price competition

A

Advertising
Brand loyalty
Quality

25
Q

When do firms engage in non-price competition

A

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

26
Q

What does the kinked demand curve represent?

A

Price stability in oligopoly markets

27
Q

Draw the kinked demand curve (basic)

A

The curve also shows that any fall in price by one firm results in inelastic demand (a less than proportional fall in quantity)
This leads to a fall in overall revenue gained
This is because the price fall is matched by other firms in the industry and the inelastic part of the D curve represents D in the whole market, which is inelastic

28
Q

What does the kinked demand curve show

A

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

29
Q

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

A

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

30
Q

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

A

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

31
Q

Draw the more complex version of the kinked demand curve

A
32
Q
A
33
Q

What are the two main aims of competition policy

A

Promote competition
increase efficiency within markets

34
Q

What does competition policy aim to ensure

A

-Innovation which promotes dynamic efficiency
-Price competition
-Safeguard of consumers

35
Q

What are the 3 pillars of competition policy

A

Anti- cartels
Market liberalisation
Merger control

36
Q

What is market liberalisation

A

Involves introducing competition in previously monopolistic sectors such as energy, banking and postal services

37
Q

Who appoints a regulator

A

The government

38
Q

Who is the main regulator in the UK

A

The CMA

39
Q

What is a regulator

A

A rule enforcer appointed to oversee how a market works and the outcomes that result for producers and consumers

40
Q

Give a real life example of when the CMA prevented two companies from mergers to align be within the consumers interest

A

Asda and Sainsburys
The CMA said the merger could lead to a ‘poorer shopping experience ‘ As the firms would have the power to drive up prices

41
Q

What is the counter argument as to why a merger forming one larger firm may be in the consumers interest

A

Economies of scale suggests that prices would decrease due to firms ability to purchase in larger quantities, reducing costs

42
Q

What are three examples of competition policy

A

De regulation
Privatisation
Tough laws on anti competitive behaviour

43
Q

Give examples of de regulation as a competition policy

A
  • Reducing barriers to entry
  • Preventing mergers which create a monopoly
44
Q

Give a real example of de - regulation

A

Laws which introduced competition into the postal services industry

45
Q

Give a real example of privitisation

A

Circulating shares of royal mail

46
Q

What is the practice of circulating shares called

A

Stock floatation

47
Q

Give two real examples of tough laws on anticompetitive behaviour

A

-Companies breaching UK competition rules risk fines of up to 10% of global turnover
- Senior executives can be jailed if negative outcomes occur due to their actions

Economics (MICRO) (10 decks)

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