Oligopolies Flashcards
(10 cards)
oligopoly
a market structure where a few large firms dominate the industry and have significant market power
Why are there high barriers to entry and exit in an oligopoly?
Entry is difficult due to dominance of a few large firms and high start-up costs (e.g. billions to start a renewable energy company).
Exit is difficult due to high sunk costs (e.g. billions spent on 5G auctions can’t be recovered).
What does a high concentration ratio mean in an oligopoly?
It shows the % of market share held by the top firms (e.g. top 5 or top 10).
A higher ratio with fewer firms means more market power is concentrated.
Example: UK supermarkets have a 5-firm concentration ratio of around 67%.
Q: What does interdependence of firms mean in an oligopoly
Firms closely watch and react to each other’s behaviour because there are few competitors.
This interdependence leads to strategic decision-making, often analysed using game theory.
what is a concentration ratio
A concentration ratio reveals what percentage of the total market share a specific number of firms have
A 5-firm concentration reveals the total market share (concentration) of the top 5 firms in the industry
How are products differentiated in an oligopoly?
- Products are often highly differentiated, especially through branding.
- Even if the products are similar (e.g. petrol), firms create strong brand identities so consumers see them as different and become brand loyal.
what is a one-firm concetration ratio
A one-firm concentration ratio of 100% would be a pure monopoly
Collusive behaviour
in oligopolies occurs when firms cooperate to fix prices and restrict output
They cease to compete as vigorously as they can
Non collusive behaviour
in oligopolies occurs when firms actively compete to maintain/increase market share