3.4.4 oligopoly

Question 1

define oligopoly?

Answer 1

Oligopoly is when there are few firms that dominate the market and have a majority of the market share, but it dosen’t mean that there won’t be other firms.

Question 2

what are the 4 key characteristics of oligopoly?

Answer 2

• the products are differentiated
• there is a high concentration ratio
• firms will be interdependent
• there are barriers to entry

Question 3

What does the kinked demand theory state?

Answer 3

This theory states that if the firm was to raise its price, other firms will not follow because their prices will be much lower so they will be more competitive. But, if the firm lowers its price other firms will also lower their price because of competition.

This means above p1 the curve will be elastic since other competitors are lowering their price, but below p1 the curve is inelastic since other firms will lower their prices and there’s little difference in sales.
The kink means there is a gap in MR curve so a rise/fall will have no effect on price or output.

Question 4

What is the problem faced with the kinked demand theory?

Answer 4

The problem faced with the kinked demand theory that it assumes there is a intial price and the market does not explain why this price was set.

Question 5

What does N-concentration ratios mean?

Answer 5

e.g the 3 firm concentration ratio shows the percentage of the total market held by the 3 biggest firms.

Question 6

Define collusion?

Answer 6

Collusion is when firms make collective agreement that reduce competition. When firms don’t collude this is known as competitive oligopoly.
e.g UK energy market

Question 7

When firms compete why is it important to lower prices?

Answer 7

If firms compete they know that lowering prices will attract new customers this will incetivise firms to lower prices further.

Question 8

would it be more efficient is the business was to work together?

Answer 8

if the firms were to work together they could maximize profits.

Question 9

what is the benefit of collusion?

Answer 9

collusion reduces the uncertainty firms face and reduces the fear of engaging in competitive price-cutting- selecting strategic price points that will best take advantage of a product/service.

Question 10

is collusion legal or illegal?

Answer 10

collusion is illegal so firms may decide to be a non-collusive oligopoly.

Question 11

what is the problem with collusion-evaluation?

Answer 11

firms may try to break the cartel prices being set

Question 12

when is the best time for collusion to take place?

Answer 12

if collusion takes place it would work best when there are few firms and they know each other well, they are not secretive about costs and similar cost production, produce similar products and there is a dominant firm, there is high barriers to entry and the market is stable.

Question 13

what does collusive oligopoly mean?

Answer 13

when firms engage in collusion; they may agree on prices, market share, or advertising expenditure.

Question 14

what are the two types of collusion?

Answer 14

overt collusion

tacit collusion

Question 15

what does overt collusion mean?

Answer 15

this is when firms come to a formal agreement.

Question 16

what does tacit collusion mean?

Answer 16

this is when there is no formal agreement.

Question 17

what does cartel?

Answer 17

this is a group of firms who enter into an agreement to mutually set prices. the rules will be laid out in a formal document.

Question 18

what are the two ways the cartel could work?

Answer 18

1. agree on price and then compete freely using non-price competition
2. agree to divide up the market according to the present market share of each business

Question 19

what is the problem faced with cartels?

Answer 19

no firm is likely to set their prices/output they would ideally choose.
-there is a constant temptation to break the cartel

Question 20

if collusion is illegal so what will firms do?

Answer 20

collusion is illegal so the firm may be involved in tacit collusion and barometric collusion.

Question 21

what does price leadership mean?

Answer 21

price leadership is where the firm has the advantage because of their size and the more dominant it is, they will have the power to set prices.

Question 22

what does barometric price leadership mean?

Answer 22

This is where the firm develops a reputation for being good at predicting the next move in the industry.

Question 23

Define non-collusive oligopoly?

Answer 23

The behavior of a firm under a non-collusive oligopoly will depend on how it thinks other firms will react to its policies. Game theory can be used to examine the best strategy a firm can adopt for each assumption about its rivals.

Question 24

what does game theory state?

Answer 24

Game theory explores the reactions of one player to changes in strategy by another player.

Question 25

what is the aim of game theory?

Answer 25

the aim of this game is to examine the best strategy a firm can adopt for each assumption about its rival’s behavior and it provides insight into independent decision making.