21 Oligopoly

Question 1

Oligopoly

Answer 1

Market structure with a few dominant firms.

Question 2

Conditions of oligopoly

Answer 2

• A few dominant sellers
• interdependence - A few dominant sellers they must base its decision-making on what other sellers are doing
• barriers to entry - must have some to step new firms from being able to compete with one dominant firms
• differentiated products i.e. Branding
• non- price competition - competing on branding and advertising

Question 3

Kinked demand curve

Answer 3

Illustrates an elastic response an increase in price and a inelastic response to a decrease in price

Question 4

Sticky prices

Answer 4

Scenario in which the price of a good is slow to change despite changes in the market that suggests different price is optimal

Question 5

Collusion

Answer 5

Scenario on which firms work together in secret to gain an unfair market advantage

Question 6

Overt collusion

Answer 6

Scenario in which firms work together with a formal agreement

Question 7

Tacit collusion

Answer 7

Scenario in which firms work together without a formal agreement often by observing other firms in the market

Question 8

Product differentiation

Answer 8

Features or elements that make one product different from competitors
- branding - customers identify with brand
- after-sales service - for higher priced products firms could offer credit of warranty to ensure customers shop withy them as opposed to competitors
- extra features - added extras too make it seem different to competitors
- performance or reliability - advertise its better than competitors

Question 9

Concentration ratio

Answer 9

• Way of measuring the market dominance of the top few firms
• by adding up each firms market share and looking at it as a percentage of total market

Question 10

Advantages of oligopoly

Answer 10

• dynamically efficient because market share is protected - more profit and innovation
• price stability in the market - customer confidence
• can gain economies of scale reducing average costs
• supernormal profits can be reinvested creating more jobs and new products

Question 11

Disadvantages of oligopoly

Answer 11

• high prices for consumers due to sticky prices
• may nit be incentivised to reduce costs - x-inefficiency
• firms may be so large they suffer from diseconomies of scale
• less choice for consumers
• allocatively and productively inefficient