oligopoly and collusion Flashcards
Characteristics of an Oligopoly
High barriers to entry and exit
High concentration ratio
Interdependence of firms
Product differentiation
Reasons for collusive behaviour
When firms agree to work together on something eg setting a price.
This leads to a lower consumer surplus, higher prices and greater profits.
Firms in an oligopoly have a strong incentive to collude.
More likely when there are only a few firms
Costs of collusion
Loss of consumer welfare, since prices are raised and output is reduced.
Absence of competition means efficiency falls. Increasing the average cost of production.
It reinforces the monopoly power of existing firms and makes it harder for new firms to enter.
Lower quantity supplied leads to a loss of allocative efficiency.
Benefits of collusion
Industry standards could improve, as firms can collaborate on technology and improve it.
Excess profits could be used for investment, which might improve efficiency in the long run. Alternatively, they might be used on dividends
Saves on duplicate research and development.
By increasing their size, firms can exploit economies of scale, which lead to lower prices.
Game theory
The interdependence between firms in an oligopoly. It is used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm.
Price wars
when firms constantly cut their prices below that of its competitors. Then the competitors lower theirs to match. etc
Predatory pricing
Firms setting low prices to drive out firms already in the industry. In the SR they make a loss but in the LR they gain.
Limit pricing
Low prices discourage the entry of other firms, so there are low profits. It ensures the price of a good is below that which a new firm entering the market would be able to sustain.
AC=AR
Characteristics of a contestable market
Face actual and potential competition.
Entrants have free access
no significant entry or exit barriers
low consumer loyalty
number of firms varies
Implications of contestable markets for the behaviour of firms
Firms are more likely to be allocatively efficient. Which makes the productively efficient
Threat of new entrants
Perfectly competitive markets
Supernormal profits SR and normal profits LR
small_ number of large firms
In an oligopoly there are a few number of large firms which co-exist with a large number of small firms.
why do oligopolies only tend to have slightly differentiated goods
Oligopolies will tend to sell similar goods which are differentiated through branding, advertising and packaging. This will allow them to establish some brand loyalty
They possess some setting powers
Oligopolies will use their brand loyalty to set price but they are also aware that they cannot set prices too high because rival firms will be able to compete and capture market share.
High barrier to entry
Oligopolies can use barriers to entry to protect their supernormal in the long run, by preventing other firms from entering the market and competing away these profts
2.1 Non-price Competition
Identify 5 types of non-price competition that oligopolist firms might wish to adopt. (2marks)
- Marketing
- loyalty points
- click and collect
- branding
- avialblity
