Oligopolies and Monopolies

Question 1

What is an oligopoly?

Answer 1

An oligopoly is a market where there are a small number of firms, but the firms are very large hence there is high concentration ratio (market concentration).

Question 2

Give a characteristic of an oligopoly.

Answer 2

There is a high concentration ratio between businesses.

Question 3

Describe a characteristic of an oligopoly.

Answer 3

High-barriers for entry.

Question 4

Give a third characteristic of an oligopoly.

Answer 4

Firms use competitive or collusive strategies to gain advantages.

Question 5

What is the n-firm concentration ratio in an oligopoly in the UK?

Answer 5

In UK, there is a five-firm concentration ratio exceeding 50% of total market share.

Question 6

Give a form of high-barrier for entry in an oligopoly.

Answer 6

Capital costs (especially in capital intensive industries) is a major barrier for entering the market; this consists of costs required for purchasing capital technology.

Question 7

Give another type of high-barrier to entry in an oligopoly.

Answer 7

Patents and copyrights: this is crucial for innovative firms with research and development to prevent copying of their original innovation.

Question 8

What is collusive behaviour

Answer 8

Collusive behaviour involves a secret cooperation between firms, involving some sort of agreement made.

Question 9

Give one type of collusion.

Answer 9

Tacit (informal collusion)

Question 10

Give another type of collusion.

Answer 10

Overt (formal collusion)

Question 11

Explain overt collusion.

Answer 11

Overt collusion is a form of formal collusion, involving an agreement to limit competition. This involves restricting output of goods through high profits and prices, not selling in certain area…

Question 12

Give an example of overt collusion.

Answer 12

A cartel - This is a group of independent firms in the same market, hence an alliance of rivals. They often seek to strengthen profits and increase prices via manipulating output.

Question 13

Explain tacit collusion.

Answer 13

This is an informal collusion where firms actively monitor each others behavior and establish an agreement without much coordination (there are unwritten rules).

Question 14

Give an example of tacit collusion.

Answer 14

Price leadership - Whenever the price leader changes its prices, smaller firms follow and are influenced by this.

Question 15

What is interdependence of firms?

Answer 15

Interdependance of firms consists of the actions of one business having a direct impact on other firms in the market. e.g. if one firm increases its sales, this can be at the expense of other firms.

Question 16

Give the two factors on the interdependence of firms.

Answer 16

• A firm’s behaviour is influenced by the actions of the firms around it
• A firm’s behaviour is also influenced by how it feels other firms will perform in the future.

Question 17

What is game theory?

Answer 17

Game theory is an important model focusing on the behaviour of interdependent firms in an oligopolistic market.

Question 18

Give the three types of price competition in an oligopoly.

Answer 18

• Price wars
• Predatory pricing
• Limit pricing

Question 19

Describe and explain price wars in an oligopoly.

Answer 19

Price wars is a form of price competition in an oligopolistic market, consisting of firms lowering their prices as much as possible to gain more market share or higher total revenue.

Question 20

What is predatory pricing?

Answer 20

Predatory pricing is a pricing strategy involving a large firm setting lower prices whenever a new entrant enters the market. Lower prices help attract more consumers, allowing the large firm to continue doing well. But this is an illegal strategy in UK and EU unless the firm restores its original price.

Question 21

What is limit pricing?

Answer 21

Limit pricing is a method involving the big firm setting as low a price to deter new firms from entering the market. Although the big firm will incur less supernormal profits in the short run, it is able to attract more consumers and thus retain its position in the monopoly. This means in the long term it will have stronger profitability.

Question 22

What is a pure monopoly?

Answer 22

Pure monopoly is a pure supplier of a good or service, hence claiming 100% market share; for example, National Rail is the only supplier of railway service in UK, so it claims 100% market share over the railway industry.

Question 23

What is a scale monopoly?

Answer 23

A scale monopoly is a market consisting of several suppliers of a good or service, each firm claiming about 25% of total market share.

Question 24

Give a characteristic of a monopoly.

Answer 24

Economies of scale

Question 25

Give another characteristic of a monopoly.

Answer 25

Dynamic efficiency - R&D firms improve capital and productivity of firms, leading to a lowering in LRAC curve.

Question 26

What is price discrimination?

Answer 26

Price discrimination involves a seller setting different prices for different consumers of the same good or service.

Question 27

What are the requirements for price discrimination?

Answer 27

Firms are price makers (they can change market price)

Question 28

What is another requirement for price discrimination?

Answer 28

The differing market segments (domestic, industrial users…) must have differing elasticity of demand.

Question 29

What is third-degree price discrimination?

Answer 29

This is a type of price discriminiation involving charging different prices of the same good or service to different groups of consumers; a theme park charges different prices to children and adults.

Question 30

Give an advantage of price discrimination.

Answer 30

Profit maximisation - Higher revenue can be gained from selling same volume of the good or service (consumer surplus is converted into revenue for seller)

Question 31

Give another advantage of price discrimination.

Answer 31

Less competition - In the inelastic demand (inelastic market), demand won’t be much affected so higher prices will be set. This allows the firm to incur more profits as a result, hence some of these profits can be invested into the elastic market, helping decrease prices. The fall in prices can attract consumers to the firm, helping drive out competitors from the market.

Question 32

Define a pure monopsony.

Answer 32

A pure monopsony is where there is one singular buyer in the market.

Question 33

Define a oligopsony.

Answer 33

An oligopsony is where there are few buyers in the market.

Question 34

What is monopsony power?

Answer 34

This is where a buyer faces little competition from other buyers for hiring labour, or obtaining a good or service; an example is healthcare, where most doctors of nurses are hired by the NHS, compared to small private healthcare firms.

Question 35

Give an advantage of monopsony to the monopsonists.

Answer 35

To the monopsonists, an advantage is higher profits as a result of buying at lower prices (firms are price makers).

Question 36

Give another advantage of a monopsony to a monopsonist.

Answer 36

Higher profits can be reinvested into the firm to improve innovation, capital which helps achieve economies of scale.

Question 37

Give an advantage of a monopsony to a consumer.

Answer 37

Lower costs faced by the monopsonist can be portrayed in the form of lower selling prices to consumers, strengthening consumer demand. But this is dependant on the price elasticity.

Question 38

Give an advantage of a monopsony to a supplier.

Answer 38

Suppliers have to focus on cutting costs to prevent being driven out of business, as they can’t cover average variable cost.