Oligopoly Flashcards
What are the key features of a oligopolistic market
A few large sellers
High barriers
Differentiated goods
Interdependence
What is overt collusion
A formal agreement between two firms to collude
What is collusion
When 2 or more firms agree to limit competition
CMA declares collusion as illegal as firms are avoiding competition to set higher prices which exploits consumers
What is tacit collusion
When there is an unspoken agreement to collude
What is predatory pricing
When a firm aggressively cuts its prices below AVC (shutdown point) to force out competitors out of the market
AR<AVC
Therefore, firms make a loss in the short run but in the long run firm can increases prices to make supernormal profit as there is no competition left
Price leadership is a…
Form of tacit collusion
One firm in a market,is the price leader, changes their prices and all other firms follow.
Tesco is the price leader as they have the highest market share of over 26%
Price agreement is a form of
Form of overt collusion
Firms agree to set the same prices
E.g
Virgin Atlantic and British airways agreed to fix their ticket prices. Virgin Atlantic confessed to the CMA which led to virgin Atlantic immune to all charges and fines by the CMA.British airways was fined £270 million
Types of price competition
Price wars
Predatory pricing
Limit pricing
Price wars
Firms continue to undercut each other with lower prices to steal other firm’s consumers to make extra profit.
This will lead to the loss of supernormal profit.
E.g
In 1990s supermarkets had a price war on baked beans leading to Tesco and Asda cutting prices of baked beans to 3p
Limit pricing?
Incumbent firms sets low prices to prevent new firms from entering the market.
Firms can do this by exploiting EoS to reduce costs to limit prices
Examples of non-price competition
Advertising
Loyalty cards
Branding
Quality of goods
Advertising
Large firms such as Apple are always making adverts for new iPhones and iPads. This is to steal consumers from other firms such as Samsung without changing prices
E.g Samsung found out that the iPhone 6 was not waterproof, so they launched an ad featuring Olympic swimmers, Samsung then made new phones with waterproof casing
Loyalty cards
Tesco’s loyalty card, Tesco club card, allows consumers to purchase goods for a cheaper price, attracting customers and increase sales
How to improve Quality (e.g apple)
Investing into R&D to increase dynamic efficiency to improve quality of goods ,for example, Apple introducing Face ID, which allows users to unlock their phones with their faces increasing security and making it harder for phones to be accessed by thieves if stolen.
This was first introduced with iPhone X which generated $62bn in revenue
Why is there Uncertainty
Decisions by one firm impacts all other firms. It is hard to predict how firms will react to another firms decision
