Oligopoply (3.4.4) Flashcards
What is an oligopoly?
When a few firms are dominating in the market (Up to 5)
What are the characteristics of Oligopolies?
-Few buyers and sellers
-Price makers
-Imperfect information
-High Barriers to entry
-Products differentiated
What is concentration ratio?
Combined market share of the biggest 3,4 or 5 brands in a market.
What is a Three-Firm, Four-Firm and Five-Firm concentration ratio?
-Combined market share of top 3/4/5 brands in a market
What does the demand curve of oligopoly firms look like?
The demand curve is kinked
Draw a kinked demand curve for Oligopoly firms
Look at slide
What does the Dcop and Dig mean in the kinked curve of the oligopoly firms graph?
Dcop- If competing firms copy your price changes
Dig-If competing firms ignore your price changes
What does the Kinked demand show?
Two potential reactions to a change in price.
What is the best thing to do with the price in an oligopoly?
Leave price as it is and focus on differentiation, branding and USP’s as a way of gaining new customers
What competition do oligopoly firms compete in?
Engage in Non-Price competition
What can both competitors in an oligopoly do to the price?
They can copy each others price increase so that they both maximize profits
What is the Game Theory?
The game theory is used to analyze and evaluate the actions of firms in oligopoly. e.g. Bob and Bill are interrogated for a major crime. Little evidence so relies on confessions. Don’t know what other person is going to say. If one is silent and the other confesses the person who confesses gets 15 years. If both stay silent they get 5 years and if both confess they get 10 years.
What is collusion?
Firms collaborate with other firms in the market
What are the two types of collusion?
-Overt- Is a type of collusion in which firms explicitly agree to limit competition or raise prices. Illegal and easier to prove.
-Tactic Collusion- Refers to a process where firms in a concentrated market might effectively share monopoly power by setting prices at a profit-maximizing, supercompetitive level
What does collusion open the door for?
Opens the door for one firm to betray the other by suddenly undercutting them or reporting them to the authorities which can bring about heavy fines for those caught.
