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A Oligopoly 2u Flashcards

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1
Q

What characterizes an oligopoly?

A

Dominated by a small number of large sellers, high concentration ratio, differentiated products

Oligopolies are defined by the dominance of a few firms in the market, leading to unique competitive dynamics.

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2
Q

What does a high concentration ratio indicate?

A

If the 5-firm concentration ratio is 60%+, this indicates an oligopoly

The concentration ratio measures the combined market share of the largest firms in the market.

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3
Q

What is the role of barriers to entry or exit in an oligopoly?

A

Barriers prevent new firms from entering or exiting the market easily

These barriers can include high startup costs, regulations, or strong brand loyalty.

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4
Q

How do firms in an oligopoly behave in terms of pricing?

A

Firms are price makers and can influence market price due to product differentiation

This means the demand curve for the firm is downward sloping.

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5
Q

What is meant by interdependence of firms in an oligopoly?

A

Firms must consider how the actions of one firm affect others

A firm’s decisions can have rapid impacts on competitors, leading to strategic planning.

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6
Q

What are the two types of oligopoly?

A

Competitive oligopoly and collusive oligopoly

Competitive oligopoly involves firms competing, while collusive oligopoly involves firms acting as a monopoly.

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7
Q

What is a price war in the context of a competitive oligopoly?

A

Firms try to undercut each other’s prices to increase market share

Price wars can lead to lower prices for consumers but may harm firms in the long run.

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8
Q

Who are the winners in a price war?

A

Consumers and surviving firms

Consumers benefit from lower prices, while surviving firms may gain market share.

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9
Q

What are the losers in a price war?

A

Weak firms, shareholders, and suppliers

Weak firms may exit the market, shareholders may lose profits, and suppliers may face reduced prices.

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10
Q

What is non-price competition in an oligopoly?

A

Methods such as product differentiation, advertising, and loyalty schemes

Oligopolistic firms may prefer these methods to avoid price wars.

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11
Q

What does the kinked demand curve illustrate?

A

It shows why prices may not adjust when a firm’s costs change

The curve indicates that demand is elastic if prices rise and inelastic if prices fall.

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12
Q

What happens to prices when costs vary between MC1 and MC2 in a kinked demand curve?

A

Prices remain stable at P

This stability occurs despite changes in costs, leading to sticky prices.

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13
Q

Complete the statement: A firm’s demand is _______ if it raises prices.

A

elastic

This means that consumers will significantly reduce their purchase quantities if prices increase.

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14
Q

Complete the statement: A firm’s demand is _______ if it cuts prices.

A

inelastic

In this case, consumers may not increase their purchase quantities significantly.

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15
Q

What is collusion?

A

Collusion is a collective agreement between firms which restricts competition.

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16
Q

What makes collusion easier in an oligopoly?

A

Fewer, larger firms involved makes it easy to make an agreement.

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17
Q

What is overt collusion?

A

Overt collusion occurs when firms openly fix prices, output, etc.; it is illegal.

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18
Q

What are high barriers to entry in relation to cartels?

A

High barriers to entry prevent cartel prices from being undercut and can result in big fines and prison sentences.

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19
Q

What is tacit collusion?

A

Tacit collusion refers to ‘behind the scenes’ agreements between firms.

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20
Q

How does strong branding affect collusion?

A

Strong branding helps consumers stick with goods even when prices are high.

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21
Q

Why is it easier to monitor output in collusion?

A

It is easy to monitor each firm’s output to ensure adherence to quotas.

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22
Q

What is price leadership?

A

Price leadership is when firms adjust their prices in line with the actions of the market leader.

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23
Q

What makes price leadership easier?

A

It is easier when demand is not volatile and if firms have similar cost structures.

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24
Q

What is whistleblowing in the context of collusion?

A

Whistleblowing occurs when a firm involved in cartel behavior reveals anti-competitive practices to avoid fines.

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25
What happens when demand is price inelastic in a cartel?
Setting a high cartel price does not impact demand much.
26
Why is cartel behavior often unstable?
There is an incentive for a firm to 'cheat' and increase output if there is no credible threat or risk.
27
What can attract new firms to a cartel?
Supernormal profits may attract new firms if barriers to entry are not high enough.
28
What happens if market demand falls in a cartel?
There may be over-capacity, putting downward pressure on the price.
29
What is the role of colluding oligopolists?
Colluding oligopolists act as a monopoly to maximize their joint profits.
30
What is the cartel price?
The cartel price is the price agreed upon by the firms, denoted as Pcartel.
31
What is an output quota in a cartel?
Each firm is given an output quota so their joint output does not exceed Qind.
32
What is the profit-maximizing output for an individual firm in a cartel?
The profit-maximizing output is Q* where its MC=MR.
33
What do regulatory and competition authorities do regarding cartels?
They use the law to break up cartels.
34
What are the costs of collusive behavior?
Absence of competition reduces efficiency and reinforces monopoly power.
35
What are the benefits of collusive behavior?
Industry standards can increase some social welfare and profits may improve dynamic efficiency.
36
What is game theory used to model?
The behaviour of firms in oligopoly ## Footnote It focuses on interdependence and strategy.
37
What is a pay-off matrix?
A table showing the possible outcomes of a game for the players depending on the strategies chosen.
38
Define duopoly.
An industry with two firms.
39
What can game theory explain regarding collusion?
The benefits of collusion (higher profits) and why collusive behaviour can be unstable.
40
What is the tendency towards in collusive behaviour according to game theory?
Nash Equilibrium.
41
What type of decisions can game theory help firms analyze?
Decisions regarding output levels and technology installation.
42
What is the first mover advantage?
When one player moves first, potentially gaining an advantage.
43
What are the possible profit outcomes when both firms charge £2?
£10m for Firm X and £10m for Firm Y.
44
What happens if both firms charge £1.80?
Profits will be £8m for Firm X and £8m for Firm Y.
45
What are the profit outcomes when Firm X charges £2 and Firm Y charges £1.80?
Firm X gets £5m profits and Firm Y gets £12m.
46
What are the profit outcomes when Firm X charges £1.80 and Firm Y charges £2?
Firm X gets £12m profits and Firm Y gets £5m.
47
What is the Nash Equilibrium in the pricing game?
(8,8) with both charging the lower price of £1.80.
48
What is predatory pricing?
Setting a price below average variable cost to force out a rival or prevent a new entrant (illegal).
49
Define limit pricing.
Setting a price low enough to deter new entrants (AR=AC).
50
What is price discrimination?
Charging a different price for the same good in different sub-markets.
51
What is the goal for firms in a competitive market?
To increase their profits.
52
List some non-pricing strategies firms may use.
* Branding/loyalty * Advertising * Creative destruction * New product/service development * New production methods * Product service quality & differentiation * Mergers/takeovers
53
How can branding and advertising affect market competition?
They can act as a barrier to entry or give a firm a competitive edge.
54
What is the potential short-term impact of some competition strategies?
They may increase costs in the short term.
55
What is the long-term benefit of some competition strategies?
They can increase demand and revenue.
56
What is game theory used to model?
The behaviour of firms in oligopoly ## Footnote It focuses on interdependence and strategy.
57
What is a pay-off matrix?
A table showing the possible outcomes of a game for the players depending on the strategies chosen.
58
Define duopoly.
An industry with two firms.
59
What can game theory explain regarding collusion?
The benefits of collusion (higher profits) and why collusive behaviour can be unstable.
60
What is the tendency towards in collusive behaviour according to game theory?
Nash Equilibrium.
61
What type of decisions can game theory help firms analyze?
Decisions regarding output levels and technology installation.
62
What is the first mover advantage?
When one player moves first, potentially gaining an advantage.
63
What are the possible profit outcomes when both firms charge £2?
£10m for Firm X and £10m for Firm Y.
64
What happens if both firms charge £1.80?
Profits will be £8m for Firm X and £8m for Firm Y.
65
What are the profit outcomes when Firm X charges £2 and Firm Y charges £1.80?
Firm X gets £5m profits and Firm Y gets £12m.
66
What are the profit outcomes when Firm X charges £1.80 and Firm Y charges £2?
Firm X gets £12m profits and Firm Y gets £5m.
67
What is the Nash Equilibrium in the pricing game?
(8,8) with both charging the lower price of £1.80.
68
What is predatory pricing?
Setting a price below average variable cost to force out a rival or prevent a new entrant (illegal).
69
Define limit pricing.
Setting a price low enough to deter new entrants (AR=AC).
70
What is price discrimination?
Charging a different price for the same good in different sub-markets.
71
What is the goal for firms in a competitive market?
To increase their profits.
72
List some non-pricing strategies firms may use.
* Branding/loyalty * Advertising * Creative destruction * New product/service development * New production methods * Product service quality & differentiation * Mergers/takeovers
73
How can branding and advertising affect market competition?
They can act as a barrier to entry or give a firm a competitive edge.
74
What is the potential short-term impact of some competition strategies?
They may increase costs in the short term.
75
What is the long-term benefit of some competition strategies?
They can increase demand and revenue.
76
What is price discrimination?
Charging different prices to different groups of consumers for an identical good or service for reasons other than differences in cost.
77
What conditions make price discrimination possible?
* High barriers to entry & firms have some monopoly power * Supplier has some pricing power * Market can be split into two or more distinct groups of consumers with different PEDs * No market seepage and low cost of keeping markets separate
78
What are the main aims of price discrimination?
* To increase revenue by extracting consumer surplus * To increase profits by raising total profit when marginal profit from extra customers is positive * To use spare capacity for more efficient supply
79
What is first degree price discrimination?
Charging each individual consumer the maximum price they are willing to pay, extracting all consumer surplus.
80
What does a firm maximize under first degree price discrimination?
Profit by producing where MC=MR.
81
What happens to consumer surplus under first degree price discrimination?
The firm extracts the consumer surplus, charging consumers the price they are willing to pay.
82
What is second degree price discrimination?
Charging different prices depending upon quantity bought, time period, or use of coupons.
83
What is peak and off-peak pricing?
Charging higher prices during peak times when demand is high and lower prices during non-peak times when there is spare capacity.
84
In the context of second degree price discrimination, when is marginal cost (MC) low?
At non-peak times.
85
In the context of second degree price discrimination, when is marginal cost (MC) high?
At peak times.
86
True or False: Price discrimination can lead to important welfare and distribution effects.
True.
87
Fill in the blank: Price discrimination helps a business make more efficient use of their _______.
supply capacity.
88
What is third degree price discrimination?
A pricing strategy where a firm charges different prices to different consumer groups based on their price elasticity of demand. ## Footnote This type of discrimination allows firms to maximize profits by adjusting prices according to consumers' willingness to pay.
89
What characterizes price inelastic demand?
Consumers are less responsive to price changes; demand does not significantly decrease when prices rise. ## Footnote Firms can charge higher prices in this sub-market.
90
What characterizes price elastic demand?
Consumers are more responsive to price changes; demand significantly decreases when prices rise. ## Footnote Firms tend to charge lower prices in this sub-market.
91
What happens when a firm sets MC=MRa in a price discriminating market?
The firm chooses output Qa and can charge price Pa in the inelastic demand sub-market. ## Footnote This is a strategy to maximize profits from consumers who are less sensitive to price changes.
92
What happens when a firm sets MC=MRb in a price discriminating market?
The firm chooses output Qb and can charge price Pb in the elastic demand sub-market. ## Footnote This allows the firm to capture more consumers who are sensitive to price.
93
What is required for price discrimination to be worthwhile for a firm?
The combined profit area of the two submarkets should exceed the profit in the whole market. ## Footnote This ensures that the strategy is financially beneficial.
94
What is a consequence of consumers in the inelastic demand sub-market?
They pay a higher price, leading to a loss of consumer welfare. ## Footnote This results in consumer exploitation as the firm extracts consumer surplus.
95
How can price discrimination reinforce monopoly power?
By allowing firms to charge higher prices, leading to reduced competition and higher long-term prices. ## Footnote This can result in a loss of allocative efficiency.
96
What role do algorithms play in price discrimination?
They increase the potential to discriminate between consumers, often leading to certain groups consistently paying more. ## Footnote An example is the use of AI in online hotel bookings.
97
What is a potential downside of multi-purchase or volume discount purchasing?
It favors higher-income families at the expense of single individuals, potentially leading to food waste. ## Footnote This creates external costs for society.
98
What are the benefits of price discrimination for firms?
Firms can make greater supernormal profits. Firms extract some of the consumer surplus to add to its profits Profits could be used to reinvest in the firm and increased dynamic efficiency Cross subsidise or improve quality Help spread demand ## Footnote This allows for reinvestment in the firm and can lead to increased dynamic efficiency.
99
How can profits from price discrimination be utilized by firms?
Profits can be used for R&D, improving quality, or cross-subsidizing loss-making services. ## Footnote This can ensure continued supply of goods/services.
100
What benefit does price discrimination provide to consumers in the elastic demand sub-market?
Some consumers may afford the good at a lower price Pb. ## Footnote This can increase market accessibility for lower-income consumers.
101
How can price discrimination help a firm utilize spare capacity?
Price can be lower during times of high capacity and higher when there is no spare capacity. ## Footnote This optimizes resource use.
102
What strategic advantage does price discrimination provide to firms entering new markets?
It can enable a firm to break into a new market, making it more competitive. ## Footnote This can facilitate expansion both domestically and internationally.
103
What does the traditional theory of the firm imply about the number of firms in an industry?
As the number of firms decreases, there is less competition, higher barriers to entry, and potentially higher prices for consumers.
104
What challenges the traditional theory of the firm?
Baumol's contestable market theory.
105
Define a contestable market.
A market where a new entrant has equal access to all production techniques and entry decisions can be reversed without cost.
106
What are barriers to entry?
Factors that block potential entrants from entering a market profitably.
107
What are barriers to exit?
Costs associated with leaving an industry.
108
What are sunk costs?
Costs that cannot be recovered if a business decides to leave an industry.
109
What is hit-and-run entry?
When a business enters an industry to take advantage of temporarily high market profits.
110
What is limit pricing?
When a firm sets its price low enough to deter new entrants.
111
Define non-price competition.
Competing through product differentiation, quality, brand advertising, and customer service, rather than price.
112
List the characteristics of contestable markets.
* Low barriers to entry and exit * No sunk costs * Equal access to technology * No collusion * Weak brand loyalty
113
What is the implication of having low barriers to entry in contestable markets?
Existing firms are under constant threat of competition.
114
How might existing firms behave in contestable markets?
* Choose limit pricing * Focus on non-price competition
115
What might new entrants aim for in contestable markets?
Sales growth maximization to establish a market foothold.
116
True or False: In contestable markets, the number of firms does not matter as long as there is free entry and exit.
True.
117
What happens to a monopoly under threat of competition in a contestable market?
It may limit price and increase output.
118
What benefits can contestable markets bring?
* Lower prices (allocative efficiency) * Incentives for cost-cutting (x-efficiency) * Incentives for innovation (dynamic efficiency) * Scope for economies of scale
119
What are the types of competition in the traditional theory of the firm?
Perfect competition, Monopolistic competition, Oligopoly, Monopoly
120
How does the number and size of firms affect competition?
As the number of firms decreases, there is less competition, higher barriers to entry, and potentially higher prices for consumers.
121
What is a contestable market?
A market where a new entrant has equal access to all production techniques and can reverse entry decisions without cost.
122
What are barriers to entry?
Factors that block potential entrants from entering a market profitably.
123
What are sunk costs?
Costs that cannot be recovered if a business decides to leave an industry.
124
What is hit-and-run entry?
When a business enters an industry to take advantage of temporarily high market profits.
125
What is limit pricing?
When a firm sets its price low enough to deter new entrants.
126
What is non-price competition?
Competing through product differentiation, quality, brand advertising, and customer service rather than price.
127
What are the characteristics of contestable markets?
Low barriers to entry & exit, equal access to technology, no collusion, and weak brand loyalty.
128
How do contestable markets affect existing firms?
Firms face constant threat of competition and may choose limit pricing or focus on non-price competition.
129
What are the benefits of contestable markets?
Lower prices, incentives for firms to cut costs, and incentives for innovation.
130
Can large firms exist in contestable markets?
Yes, there is scope for economies of scale.

econ max (33 decks)

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