3.4.4- Oligopoly

Question 1

What are the characteristics of an oligopoly?

Answer 1

-differentiated products
-many buyers + a few dominant sellers
-interdependent decision making
-barriers to entry/exit
-price makers
-imperfect information

Question 2

What happens if a firm in an oligopoly raises its price according to the kinked demand curve?

Answer 2

Other firms wont follow so they lose a significant number of customers

Question 3

What happens if a firm in an oligopoly lowers its price according to the kinked demand curve?

Answer 3

Other firms will follow so they don’t acquire many extra customers

Question 4

What is the name of the stable price?

Answer 4

Sticky price

Question 5

What is an evaluation of the kinked demand curve?

Answer 5

Don’t know the stable price level

Question 6

How do you work out the N-firm concentration ratio?

Answer 6

total sales of n firms/ total size of market * 100

Question 7

What is collusion?

Answer 7

When firms make collective agreements that reduce competition

Question 8

What is good about collusion?

Answer 8

-can maximise industry profits
-reduces fear of price wars

Question 9

What is bad about collusion?

Answer 9

-illegal
-risk of breaking the cartel

Question 10

What is a credible threat?

Answer 10

A threat to prevent a cartel being broken like whistleblowing or threatening the supplier to stop supplying to them

Question 11

What is a cartel?

Answer 11

A formal collusive agreement where rules are laid out in a formal document and fines are charged to those who break the rules

Question 12

What is price leadership?

Answer 12

One firm has advantages due to its size or costs and becomes the dominant firm so other firms follow this firm as they wouldn’t want to take it on in a price war

Question 13

What is a non-collusive oligopoly?

Answer 13

Behaviour depends on how it thinks other firms will react to its policies

Question 14

What is game theory?

Answer 14

Explores the reactions of one player to changes in strategy by another player

Question 15

What is the maxi-min strategy?

Answer 15

Least worst outcome

Question 16

What is the maxi-max strategy?

Answer 16

Best possible outcome

Question 17

What is the dominant strategy?

Answer 17

Both maximin and maximax

Question 18

What is nash equilibrium?

Answer 18

Where neither player is able to improve their position and has optimised their outcome based on other players expected decision

Question 19

What is the name of the prisoners dilemma diagram?

Answer 19

Pay off matrix

Question 20

What are the types of price competition?

Answer 20

-price wars
-predatory pricing
-limit pricing
-cost plus pricing
-psychological pricing
-market led pricing
-price skimming
-penetration pricing

Question 21

When do price wars occur?

Answer 21

When non-price competition is weak and its difficult to collude

Question 22

What is an example of an industry that has price wars?

Answer 22

Supermarkets

Question 23

What is predatory pricing?

Answer 23

When an established firm sets a low price that other firms are unable to make a profit from so will be driven out of the market, then rises the price again

Question 24

What is the evaluation of predatory pricing?

Answer 24

-illegal
-only works is business is large and can sustain losses

Question 25

What is limit pricing?

Answer 25

Firms set prices low to discourage any new entrants but high enough to make normal profit

Question 26

What is the disadvantage of limit pricing?

Answer 26

Firms can't make high profits

Question 27

What is cost plus pricing?

Answer 27

Firms work out their average costs and add a percentage increase which determines the level of profit they make

Question 28

What is psychological pricing?

Answer 28

Non rounded pricing to give an impression that the price is cheap

Question 29

What is market led pricing?

Answer 29

Firms set prices by looking at prices charged by competition

Question 30

What is price skimming?

Answer 30

Initially sets prices high to cover R+D costs and keep demand manageable, then lowers the price

Question 31

What type of companies is price skimming usually used for?

Answer 31

Tech companies

Question 32

What is penetration pricing?

Answer 32

Initially sets low prices then raises once people have loyalty

Question 33

What are the types of non price competition?

Answer 33

-advertising -loyalty cards -branding -quality -customer service -product development

Question 34

What is an evaluation of non-price competition?

Answer 34

-expensive -doesn't guarantee success

Question 35

How efficient are oligopolies?

Answer 35

-not productively or allocatively efficient -dynamically efficient due to SNP

Question 36

What are the criticisms of game theory?

Answer 36

-more than 2 firms in a market -brand loyalty -assumes homogenous product -assumes firms and consumers are rational -ignores elasticity -may not be full level of info -collusion is illegal

Question 37

What is a real world example of collusion?

Answer 37

British Airways and Virgin Atlantic colluded over long haul return flights from 2004 to 2006, and raised prices from £5 to £60 per ticket

Question 38

What was the result of collusion between British Airways and Virgin Atlantic?

Answer 38

BA was fined £300million but VA were given immunity as they were the ones who 'snitched'

Question 39

What is the oil producing cartel called?

Answer 39

Organisation of Petroleum exporting countries (OPEC)

Question 40

What is an example of a firm being fined for breaking legislation?

Answer 40

EU fined TikTok €345mn for breaching children's data rules in Sept 2023

Question 41

What’s an example of a legal cartel?

Answer 41

OPEC (petrol)