Oligopolies Flashcards
(20 cards)
What is an oligopoly?
A market structure dominated by a few firms.
List key characteristics of an oligopoly.
- Few Firms
- High Concentration Ratio
- Differentiated Goods
- High Barriers to Entry and Exit
- Interdependence
- Price Rigidity
- Non-Price Competition
What is the high concentration ratio in an oligopoly?
top seven firms collectively hold around 70% of the market share.
What does it mean for goods to be differentiated in an oligopoly?
Firms offer unique products, granting them some degree of pricing power.
What are high barriers to entry and exit in an oligopoly?
Significant obstacles such as startup costs, economies of scale, sunk costs, and strong brand loyalty.
Define interdependence in the context of an oligopoly.
Firms make decisions based on the actions and reactions of their rivals.
What is price rigidity in an oligopoly?
Prices tend to be stable due to careful consideration of competitors’ actions. (inelastic and elastic demand around it!)
What is non-price competition?
Competition through branding, advertising, product quality, and service quality rather than price wars.
True or False: Profit maximization is the sole objective for firms in an oligopoly.
False
They fight for MARKET SHARE!
Provide an example of a global oligopoly.
UK Supermarkets
What does the kinked demand curve model illustrate?
Interdependence and price rigidity in oligopolistic markets.
What happens if a firm raises its price above P1 in the kinked demand curve model?
Demand decreases significantly as other firms don’t follow, leading to a loss of market share.
(total rev decreases for the firm)
What occurs if a firm lowers its price below P1?
Other firms likely match the price cut, resulting in a price war.
(total rev decreases for the firm)
What is the marginal revenue (MR) curve in the kinked demand model?
The MR curve has a vertical gap and is twice as steep as the average revenue (AR) curve.
What does the kinked demand curve model suggest about price changes?
As long as costs change within the vertical gap, price adjustments are unlikely.
What is a price war?
Intense competition where companies lower prices to undercut rivals.
What is a more logical conclusion from the kinked demand model?
The prevalence of non-price competition due to sticky prices.
What is the role of interdependence in oligopolies?
Firms must monitor rivals’ actions, creating a temptation to collude.
Fill in the blank: An oligopoly is characterized by high barriers to _______.
Entry and Exit
Why is there a temptation to collude?
Many resources are spent on interdependence
if they work together and fix their prices
they can act as a monopoly and
earn very large profits
