3.4.4/6 Oligopoly/monopsony +3.3.4 profits and loses

Question 1

Oligopoly

Answer 1

A market structure where a few firms dominate the market, therefore there is a high concentration ratio

Question 2

Barriers to entry and exit

Answer 2

factors that make it difficult for new firms to enter or leave markets such as high set up cost and sunk costs respectively

Question 3

Normal profits

Answer 3

The level of profit needed to keep risk-taking resources in their current use.
normal profit occurs when AC = AR or TC = TR

Question 4

Supernormal profits

Answer 4

Profits that are above normal profit levels
supernormal profits exist if TR > TC (as normal profits included in TC)
also referred to as abnormal profits

Question 5

Shut-down point

Answer 5

In the short run a firm will shut down if TVC > TR and in the long run a firm will shut down if TC > TR

Question 6

interdependence of firms

Answer 6

The actions of one firm depends upon the actions of another. This is a feature of a oligopoly market

Question 7

collusion

Answer 7

An agreement between two or more firms to limit competition and therefore divide the market, set prices of output, and increase profits for the firms involved

Question 8

overt collusion

Answer 8

where firms openly fix prices, output, marketing or the sharing out of customers. There is a formal agreement through verbal or written means

Question 9

tacit collusion

Answer 9

this is “quiet” or “behind the scenes” collusion firms have no spoken or written agreements but results in a collection of firms avoiding competition, such as following the decisions of the market leader

Question 10

game theory

Answer 10

The study of strategies used to make decisions

Question 11

Price wars

Answer 11

When the price cutting by one firm results in retaliation by other firms who also cut their prices to increase sales

Question 12

predatory pricing

Answer 12

A firm cuts prices below average costs to force a competitor out of the market. This is a short term measure as once competition is reduced, firms can raise prices

Question 13

price leadership

Answer 13

a dominant firm acts to change prices and the other firms in the market follow their price movements

Question 14

limit pricing

Answer 14

existing firms cut the price of the product to the point that a possible new entrant could not match as they are unable to exploit economies of scale to the same extent as the incumbent firm

Question 15

non-price competition

Answer 15

firms take action to compete without changing prices such as branding, advertising, promotional offers and sponsorship

Question 16

monopsony

Answer 16

A pure monopsony is a firm that is the sole buyer of a product or resource. A pure monopsony is unusual but many firms have some degree monopsony power and therefore have some buying power and control over their suppliers and workers