Oligopoly

Question 1

What are the characteristics of oligopoly?

Answer 1

few firms in a market
higher barriers to entry
products can be homogeneous or differentiated
branding is crucial 
interdependence of firms

Question 2

What is collusion?

Answer 2

firms cooperate with each other, especially over what prices are charged

Question 3

What is the difference between tacit and overt collusion?

Answer 3

tacit - happens without any agreements or contracts, each firm knows its in their best interest to compete
overt - involves open agreements between firms

Question 4

What is a cartel?

Answer 4

an overt collusion, which is illegal

Question 5

What is price leadership?

Answer 5

dominant firm sets the price and other firms follow it, leading to higher prices and lower output

Question 6

Explain 3 forms of price competition

Answer 6

Price wars - when a firm lowers prices to increase market share, other firms react by further lowering prices which indulges them in a price war
Predatory pricing - when a firm forces competition out by setting prices really low, may be below average price
Limit pricing - when firms only make normal profits to deter other to join the market

Question 7

Explain 4 forms of non-price competition?

Answer 7

advertising
brand loyalty
quality of goods
customer service

Question 8

Does oligopoly result in allocative efficiency?

Answer 8

if competitive - yes

if not competitive - no

Question 9

Does oligopoly result in productive efficiency?

Answer 9

if competitive - yes

if not competitive - no

Question 10

Does oligopoly result in dynamic efficiency?

Answer 10

if competitive - no

if not competitive - yes

Question 11

Does oligopoly result in X-efficiency?

Answer 11

if competitive - no

if not competitive - yes

Question 12

What are the advantages of oligopoly?

Answer 12

• price wars lead to increased consumer surplus
• higher dynamic efficiency
• larger economy of scale
• high super normal profits (dependent on competitiveness)

Question 13

What are the disadvantages of oligopoly?

Answer 13

• cartel behavior leads to higher prices
• higher concentration ratio limits consumer choice
• persuasive advertising can manipulate preferences
• transnational oligopolies can avoid paying tax which leaves less money for the government