Theme 3: Oligopoly Flashcards
What is game theory?
If a market is oligopolistic so firms are interdependent. One firms actions directly effect another firm.
What are 4 key features of an oligopoly?
- Few large sellers
- High barriers
- Differentiated goods
- Interdependence
What are the 3 main ways firms compete on price?
- Price wars
- Predatory pricing- dropping prices below short run shutdown point AVC=AR
- Limit pricing- using economies of scale so make prices lower so new firms cannot enter
What are the 4 main ways of non-price competition
- Advertising
- Loyalty cards
- Branding
- Quality- AR>AC
What happens to revenue if price increases and demand is inelastic?
Total revenue increase
What happens if price decreases and demand is inelastic
Total revenue decreases
What happens if price increases and demand is elastic
Total revenue decreases
What happens if price decreases and demand is elastic
total revenue increases
What are the two types of collusion
Overt and Tacit
What is a price war?
Firms compete and undercut each other. Leading eventually to lower prices overall and lower profit.
What is covert collusion?
Formal agreement between firms to keep high prices and avoid competition which is bad for consumers and illegal.
What is tacit collusion
Unspoken agreement between firms to keep prices.
