Oligopoly

Question 1

What are the 4 characteristics of an oligopoly?

Answer 1

1) A high concentration ratio: A small number of firms supply a large proportion of the market.
2) Product differentiation.
3) Interdependence of firms: The actions of one firm in the market will impact other firms.
4) High barriers to entry/exit: Firms in an oligopoly are typically large, meaning the scale of operation is large, deterring new firms from entering the market.

Question 2

What is the concentration ratio?

Answer 2

A measure of the level of domination in a market.

Question 3

What is the formula for the concentration ratio?

Answer 3

(Sum of market share of the number of firms ÷ total market size) X 100.

Question 4

Why is there uncertainty amongst firms in an oligopoly?

Answer 4

Firms do not know how others will react to changes in the market, as there is not perfect information.

Question 5

What is collusion?

Answer 5

A collective agreement between firms that may reduce competition, e.g. co-ordinating an increase in prices. It is illegal and can harm consumers by restricting competition.

Question 6

What are the 2 types of collusion?

Answer 6

1) Overt collusion: A formal, usually secretive agreement between firms.
2) Tacit collusion: When a firm accepts the decision of a dominant firm.

Question 7

What is game theory?

Answer 7

A study of the decision-making of economic agents, used to predict their behaviours and strategies through mathematical models.

Question 8

What are the 3 types of price competition in oligopolies?

Answer 8

1) Predatory pricing.
2) Limit pricing.
3) Price war.

Question 9

What is predatory pricing?

Answer 9

A pricing strategy where a firm will lower its prices when a new firm enters the market, in order to force them out of it.

Question 10

What is limit pricing?

Answer 10

Setting a price just low enough to prevent new firms from entering the market.

Question 11

What are price wars?

Answer 11

Where firms in a market repeatedly lower their prices in order to gain an advantage over rivals.

Question 12

What is price competition?

Answer 12

The use of price by firms to stay ahead of rivals.

Question 13

What is non-price competition?

Answer 13

The use of strategies, other than price, to increase sales, revenue, and profit.

Question 14

Why is non-price competition regarded as a safer strategy than price competition for oligopolistic firms?

Answer 14

If a firm adjusts their prices in an oligopoly, but competitors do not follow suit, they face the risk of losing sales. They will not know this beforehand, due to imperfect information.

Question 15

What are 5 types of non-price competition?

Answer 15

1) Advertising.
2) Loyalty schemes.
3) Branding.
4) Packaging.
5) Better quality customer service.

Question 16

How can loyalty schemes increase a firm’s sales/revenue/profit?

Answer 16

They provide discounts and gifts in order to encourage repeat purchases, and stand out from rivals.

Question 17

How can branding increase a firm’s sales/revenue/profit?

Answer 17

By promoting and enhancing their brand, firms are able to stand out with products which have seemingly unique characteristics.

Question 18

How can advertising increase a firm’s sales/revenue/profit?

Answer 18

By promoting a product to potential consumers, firms see a drastic increase in sales.

Question 19

How can packaging increase a firm’s sales/revenue/profit?

Answer 19

Some firms use unique/distinctive packaging to differentiate their product from other firms.

Question 20

How can better quality customer service increase a firm’s sales/revenue/profit?

Answer 20

High quality customer service will make customers feel valued and supported, increasing the chance of repeat consumption.

Question 21

What is a cartel?

Answer 21

A formal agreement between a group of producers of a good/service to control supply or to regulate or manipulate prices.