Topic 1: Oligopoly

Question 1

High market concentration

Answer 1

A few large firms which dominate the market by having big market shares

Question 2

Interdependence

Answer 2

Means that firms take decisions in the lightning the behaviour, or the expected reactions of the other firms in the industry

Question 3

Barriers to entry

Answer 3

Things which make it hard for new firms to enter the market e.g the need to invest in machinery

Question 4

Characteristics of oligopoly

Answer 4

High market concentration
Barriers to entry
Interdependence

Question 5

Oligopoly

Answer 5

A market structure with a few firms where there is a high market concentration, interdependence and barriers to entry

Question 6

Facts about oligopolies

Answer 6

• 5 banks dominate the banking sector and were accused of being oligopolies by Virgin bank
• four companies share 74.4% of the grocery market
• the detergent market is dominated by two players, unilever and Procter and game
• six utilities (EDF energy, centrica, RWE, m power, E-on, Scottish power and Scottish and southern energy) share 95% of the retail electricity market

Question 7

Game theory

Answer 7

The analysis of situations in which players are interdependent

Question 8

Zero-sum games

Answer 8

Only one winner. A player benefits only at the equal expenses of others. E.g in power one wins exactly the amount ones opponents lose

Question 9

Collusion

Answer 9

When firms work together or collaborate

Question 10

Overt collusion

Answer 10

When firms collude by formal. The firms may send messages to others about prices and other decisions e.g OPECsZzs

Question 11

Tacit collusion

Answer 11

When firms collude without any formal agreement having been reached or even without any explicit communication between the firms having taken place

Question 12

Cartels

Answer 12

An organisation of producers which exists to further the interests of its members often by restricting output through the imposition or quotas, leading to a rise in price

Question 13

Non-pricing strategies

Answer 13

• loyalty cards
• advertising
• point of sales promotion
• celebrity endorsement
• public relations
• sponsorship -free gifts

Question 14

Price wars

Answer 14

When firms retaliate to price cuts by others with price cuts of their own

Question 15

Predatory pricing

Answer 15

A big firm driving its prices down to force competitors out of a market and them putting them back up again once it’s objective has been achieved
-it is illegal

Question 16

Price fixing

Answer 16

When firms work together to fix their prices rather than compete against each other
When firms come to an agreement on a price for their products rather than compete against each other

Question 17

Price leadership

Answer 17

When one company usually the dominant one in a market sets prices which are closely followed by its competitors

Question 18

Pay-off matrix

Answer 18

High price. Low price
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Question 19

Contestability

Signs of high level of Contestability

Answer 19

Is a measure of the ease with which firms can enter or exit an industry

• low levels of supernormal profits
• low barriers to entry or exit
• low concentration ratios
• low sunk costs
• low levels of collusion or other signs of oligopoly