B2.01.14: Intro to Oligopoly Flashcards
Define oligopoly
A few firms dominating the market
Define Market share
A percentage of the total shares or revenues in a specific market that’s controlled by a company or product
8 Assumptions of Oligopolies?
- Few dominant firms: High conc. rate
- Interdependence: price rigidity (actions of one firm directly impact the others)
- Significant Barriers to Entry: Substantial start-up costs, EOS and established brand loyalty
- Product differentiation: To distinguish offerings from competitors
- Non-price competition: Adverts, Innovation and customer service
- Collusion (Firms coordinating their actions to manipulate the market)
- Price Rigidity (Prices resistant to change even in response to fluctuations in demand due to fear of price wars)
- Profit maximisation not sole objective
Define concentration ratios and how to use them to determine the number of firms dominating the market
- A measure of market share of a certain number of firms
- an increase in the ratio indicates fewer firms dominating the market
Formula for concentration ratios?
Biggest to smallest
- Market Share Firm 1 + Market Share Firm 2…
- Final answer has to be in percentage
What does the oligopoly diagram to show efficiencies look like?
- Perfect competition diagram
What does the kinked demand curve show
- Clearly demonstrates interdependence by showing price rigidity (firms don’t want to nor do they need to change prices)
- Shows inelastic and elastic demand
How does the kinked demand curve show that firms don’t want to change the price by increasing it?
- When p1 increases to p2, the q.d. decrease is proportionally greater than the increase, q1 to q2.
- This is due to interdependence; other firms are not going to follow this price rise as they are looking to gain market share and undercut this firm
- This will result in TR and marker power to decrease for this firm
- Therefore, raising prices makes no rational sense due to interdependence and how other firms will react
How does the kinked demand curve show that firms don’t want to change the price by decreasing it?
- When price decreases from p1 to p3, the q.d decrease is proportionally less, q1 to q3
- This is due to other firms and how they are going to react. Other firms follow looking to protect their market share and get into a price war
- This will result in total revenue to decrease (as the demand is inelastic) and over time, there’s going to be no change in the market share
- Therefore, this shows that firms won’t gain any market share in the long run if prices get reduced
How does the kinked demand curve show that firms don’t need to change the price
- Due to the vertical gap between AR and MR, a profit-maximising oligopoly will be charging a price at p1
- This is because MC=MR (profit maximisation point) gives us a quantity of q1 and as long as the quantity is q1, this will always give a price of p1.
