Oligopoly Flashcards
What are the characteristics of oligopoly?
Imperfectly competitive - high levels of concentration
High barriers to entry and exit
Top 5 firms have 60% of market share
Price Makers
Each firm supplies branded products, which may or may not be properly differentiated
What is the meaning of strategic interdependence?
This means the prices are influenced by the likely behaviour of competitors/rivals
What is the concentration ratio?
It measure the combined market share of of the top firms in the industry
What is non-collusive behavior in oligopoly?
This means firms do not work together and instead compete with each other.
What are some non-price competition methods in oligoploy?
Innovation
Quality of service
Free upgrades to products
Exclusivity and loyalty schemes
Branding and advertising
Sales promotion
How can businesses collude?
Horizontal - same stage in production
Vertical - different stages in production
Overt vs Tacit collusion (open vs quiet)
What are the key aims for collusion in oligopoly?
Maximise joint profits
Lowers the cost of competition
Reduces uncertainty
What are some legal forms of collusion?
Development of improved industry standards of production and safety which benefit the consumer
Information sharing to help the consumer
What is overt (formal) collusion?
Overt means open, spoken or traceable
What are conditions for price fixing cartels to likely have an oligopoly?
Industry regulators are ineffective
Penalties for collusion are low relative to gain profits
Few firms in the market
Participating firms have high percentage of sales
Firms can communicate well and trust each other
Brands are strong so consumers wont switch when prices are raised
Why do price fixing cartels eventually break down?
Economic recession
Entry of non cartel business
Over production within cartel
Whistleblowers
What are the costs of collusive behavior?
Damages to consumer welfare
- Higher prices
- Loss of allocative efficiency
- Hits lower income households
Absence of competition hits efficiency
- Less incentive to innovate
- X-inefficiencies lead to higher unit costs
Reinforces the cartel’s monopoly power
- Harder for new businesses to enter market
What are the possible benefits of collusion?
General industry standards can bring social benefits from
- Pharmaceutical research
- Improved car safety technology
Fairer prices for producer cooperatives in lower and middle-income developing countries
- Competing more effectively
- May decrease rates of extreme income poverty
Profits have value
- Research and development
- Higer wages for employees
What is game theory
It is the theory of how people and businesses behave in strategic situations.
What is nash equilibrium?
It is when any situation where all participants are pursuing their best strategy given all the strategies of all other participant.
