Oligopoly

Question 1

Characteristics of an oligopoly (5)

Answer 1

High barriers to enter/exit
Slightly heterogenous but in highly conc. = homogenous (supermarkets)
Interdependent
Very few firms
Top 5 = 60% of market share

Question 2

Define oligopoly (2+)

Answer 2

Market dominated by a few companies
Use competitive or collusive strategies to make interdependence work to their advantage

Question 3

What is a conc. ratio

Answer 3

Ratio of the combined market shares of a given number of firms to the whole market size

Question 4

How to calculate conc. ratio (3)

Answer 4

Add up sales of top 3-5 firms
Divide by total market sales
X100%

Question 5

Why do oligopolies collude (2)

Answer 5

Strong incentives
Agreements to restrict comp. To max own benefits

Question 6

What has collusion led to (3+)

Answer 6

Higher prices and higher profits
Restrict output
Collude to fix output at a level which maximiser sprofits

Question 7

Types of collusion (2)

Answer 7

Overt / formal
Tacos / informal

Question 8

What is overt collusion (4++)

Answer 8

When firms make agreements to limit competition
Agree to limit output to raise prices
Open for everyone to see = OPEC attempts to manipulate world price of oil by restricting supply
Production limits or price fixing

Question 9

What is a cartel

Answer 9

Wide ranging agreement is made amongst several firms within a market

Question 10

For a cartel to function what (3)

Answer 10

Agreement must be reached
Cheating is or£vented
Potential competition is restricted

Question 11

What is tacit collusion (3)

Answer 11

Firms don’t make formal agreements about cooperating
Each firms monitors behaviour closely
Unwritten rules = become practise + custom

Question 12

Tacit collusion example (3)

Answer 12

Price leadership - one firm sets price and others follow
Firms don’t try and take customers from others
Advertising expenditure is kept low

Question 13

Easy simple description of types of collusion (2+)

Answer 13

Overt / formal = actually chnaged
Tacit / informal = “just so happens”

Question 14

What is price competition (3)

Answer 14

Price wars
Predatory pricing = price at a loss
Limit pricing = price low to make normal profits

Question 15

Price wars in short run + long run (2+)

Answer 15

SR = Firms stay in market = cover variable costs
LR = firms leave or demand increases = prices rise as supply falls

Question 16

Predatory pricing (4+)

Answer 16

Est. firm in a market is threatened by a new entrant
Est. firm responds = setting such a low price that the new entrant cannot make enough profit = drive the new entrant out of the market
Once this is achieved prices return to normal
Used as a way to defend market share

Question 17

Price wars (2)

Answer 17

Occur in markets where non price competition is weak
They drive prices down to levels where firms are frequently making losses

Question 18

Limit pricing (3+)

Answer 18

Larger firm reduces prices to the extent where they themselves can make a normal profit but new entrants are discouraged
The limit price is greater when there are higher barriers to entry to the market = less likely that a new entrant would try and enter the market in the first place

Question 19

Non price competition (5+)

Answer 19

Advertising / marketing
Quality
Sustainability
Differentiate goods
Location = convenience + sell online