Oligopoly Flashcards
What are the characteristics of an oligopoly?
An oligopoly is a market that’s dominated by a few firms, with a high concentration ratio, who are price makers. The firms have highly branded, differentiated products and have high loyalty from customers. They make supernormal profits in the short run and the long run. They are allocatively and productively inefficient, making them x-inefficient. There are high barriers to entry and exit. They have price and non-price competition. There’s interdependence and uncertainty.
What’s the application paragraph for the kinked demand curve?
As can be seen from the diagram, if an oligopoly raises its price, other firms won’t follow because they want to maintain market share. It’ll cost 10 to replace a customer than to keep an existing customer. If an oligopoly lowers its price, other firms will follow. If you lower the price of an inelastic good, revenue will fall. If you raise the price of an elastic good, revenue will fall. Therefore you have price rigidity; sticky prices. An oligopoly doesn’t want to change its price.
What’s the application for the discontinuity of the marginal revenue curve?
As can be seen from the diagram, an oligopoly doesn’t need to change its price because of the discontinuity of the marginal revenue curve. A firm is profit maximising where MR = MC. If the MC curve shifts from MC to MC!, the firm is still profit maximising. Only if the MC curve shifts to MC2, the firm will have to change its price.
What’s game theory?
Game theory explores the reactions of one firm to a change in strategy to another. It suggests that the best option is the second best option. An oligopoly will do what’s best for the firm.
What’s collusion?
Collusion is where firms recognise their interdependence and uncertainty and come together, rather than compete, and undertake profit maximisation.
What conditions are needed for collusion to occur?
Collusion must occur in an imperfect market, you must have total control over the market and the product must be inelastic in demand.
What’s tacit collusion?
Tacit collusion is where you get price leadership e.g, Tesco’s.
What’s overt collusion?
Where firms undertake price fixing (illegal).
What are the two types of overt collusion?
Horizontal (firms at the same stage of the production process) and Vertical (firms at different stages of the production process).
What’s the application paragraph for collusion?
As can be seen from the diagram, the industry is profit maximising where MR = MC. These firms have undertaken overt collusion (price fixing). Each individual firm is making supernormal profits, but they’re each given a quota of supply.
What are the pros of collusion for producers?
Profit maximisation.
External growth.
Avoid the principal agent problem.
What are the cons of collusion for producers?
Attention from the CMA.
Attention from governments.
New entrants.
What are the pros of collusion for consumers?
Guaranteed supply.
Research and Development.
What are the cons of collusion for consumers?
High prices.
Less choice.
Poor quality.
