Oligopoly (T.O.T.F) Flashcards
What is the definition of an oligopoly market
A small number of of firms each with a degree of market power (ability to influence price and quantity)
What type of profit do oligopoly firms make in the long run
Supernormal profit
Why do firms in oligopoly make supernormal profit in the long run
Strong barriers to entry
Give 3 examples of oligopoly markets
Supermarkets
Banks
Network providers
How can we measure oligopoly power
Using concentration ratios which includes adding up the market share of the biggest firms
Oligopoly firms are characterised by interdependence, what does this mean?
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
What are the two strategic decisions which can be taken by oligopoly firms
Collude or Compete
What does competing usually mean for oligopoly firms
A price war
Why is a price war bad for oligopoly firms
A price decrease initiated by a single firm is matched by all firms and therefore all firms make less profit
In what scenario is competing strategically effective for oligopoly firms
Competing is only effective if it results in firms permanently increasing their market share at the expense of rivals
During oligopoly competition, what are the two ways that a firm may permanently increase its market share at the expense of rivals
- A competitor may leave a market
- Consumers may permanently switch brand loyalty
What are two types of collusion
Explicit
Implicit
How does explicit collusion arise
By firms forming a cartel
Draw the diagram showing explicit collusion
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
Explain how explicit collusion works
- 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
What do the total quotas of all firms within a cartel add up to
Total output in the market
Why do most cartels fail
Due to cheating
What is cheating within a cartel
If an individual body decides to produce more than its quota
How are cartels often caught
Due to whistleblowers who inform the CMA, incriminating other firms in return for immunity
Why does cheating lead to failure within a cartel
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
Who are the CMA
Competition and markets authority
What is the price leadership model
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
What is implicit collusion
When firms in oligopoly follow the price leadership model
Why do profits rise when following the price leadership model in implicit collusion
When prices rise, and as demand overall is inelastic, revenues and profits will rise
What happens if other firms dont follow suit when a firm raises its prices
The original ‘mover’ will lower prices back in line with the others in the market
When is price leadership more successful
1- There is a way of indirectly communicating the price to other firms in the market
2- The product is more homogeneous
Give examples non price competition
Advertising
Brand loyalty
Quality
When do firms engage in non-price competition
When they do not have the ability/option to collude and they might think that a price war is unwinnable
What does the kinked demand curve represent?
Price stability in oligopoly markets
Draw the kinked demand curve (basic)
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
What does the kinked demand curve show
Shows how both a price increase and decrease leads to worse outcomes for the firm
From the kinked demand curve, what does a rise in price by a firm show
It shows that a rise in price results in elastic demand (a more than proportional fall in quantity)
From the kinked demand curve, what does a fall in price by a firm show
Shows that a fall in price by one firm leads to inelastic demand (a less than proportional increase in quantity)
Draw the more complex version of the kinked demand curve
What are the two main aims of competition policy
Promote competition
increase efficiency within markets
What does competition policy aim to ensure (3)
-Innovation which promotes dynamic efficiency
-Price competition
-Safeguard of consumers
What are the 3 pillars of competition policy
Anti- cartels
Market liberalisation
Merger control
What is market liberalisation
Involves introducing competition in previously monopolistic sectors such as energy, banking and postal services
Who appoints a regulator
The government
Who is the main regulator in the UK
The CMA
What is a regulator
A rule enforcer appointed to oversee how a market works and the outcomes that result for producers and consumers
Give a real life example of when the CMA prevented two companies from mergers to align be within the consumers interest
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
Activision & Microsoft
CMA said the firms will have too much power in a growing market
However the head of the CMA got sacked for this reason indicating the CMA were too harsh, as the government stated they were too much of a barrier to growth
What is the counter argument as to why a merger forming one larger firm may be in the consumers interest
Economies of scale suggests that prices would decrease due to firms ability to purchase in larger quantities, reducing costs
What are three examples of competition policy
De regulation
Privatisation
Tough laws on anti competitive behaviour
Give examples of de regulation as a competition policy
- Reducing barriers to entry
- Preventing mergers which create a monopoly
Give a real example of de - regulation
Laws which introduced competition into the postal services industry
Give a real example of privitisation
Circulating shares of royal mail
What is the practice of circulating shares called
Stock floatation
Give two examples of tough laws on anticompetitive behaviour
-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
Give 3 real examples of laws which display market liberation
Deregulation of the Bus Industry (1985) – The Transport Act allowed private companies to compete with public transport services outside of London.
Gas Market Liberalization (1996-1998) – The UK opened up the domestic gas market to competition, ending British Gas’s monopoly
The Big Bang occurred on October 27, 1986, when the London Stock Exchange (LSE) was deregulated and became a private limited company leading to increased competition and foreign investment.
What is the role of competition policy (small sentence describing comp policy/regulation)
Overseeing:
Mergers
Anticompetitive practices (e.g.Price fixing)
Collusive behaviour
How does the kinked demand curve show interdependence in oligopoly markets
Above the kink: demand is elastic (flat)
If a firm raises its price, others don’t follow, and it loses a lot of customers
Below the kink: demand is inelastic (steep)
If a firm lowers its price, others match the cut, so it gains little to no market share
Hence this price stability is due to the interdependence of firms, hesitating to move from the market price due to these worse outcomes
