Oligopoly Flashcards
(18 cards)
Characteristics of an Oligopoly?
• Dominated by a small number of large sellers (firms)
• High concentration ratio
• Most likely differentiated products
• High barriers to entry or exit
• Firms are price makers - they can influence the market price because
products are not identical; demand to the firm slopes downwards to
the right and MR is twice as steep as AR
• Supernormal profit is possible in the long run
What is the concentration ratio?
The concentration ratio measures the combined market share of a leading cluster of businesses in a clearly defined market.
E.g. the five-firm concentration ratio is the sum of the market shares of the largest five firms as a %.
(If the 5-firm CR is 60%+ this indicates an oligopoly)
What is a Price War
When firms try to undercut eachother’s prices, to increase their market share
Losers in a Price War
Consumers
- loss of choice if firm is
forced to leave
Firms
- lose profit in the short run
Firms
- weakest firms may have to leave
**Shareholders
- may lose profit
Suppliers
- may lose profit if they cannot charge such high prices
Gainers in a Price War?
Consumers
- lower prices, higher
consumer surplus
Surviving firms
- gain market share and increase longer term profit
Firms
- may be able to use their
monopsony power to depress the prices they pay to suppliers to cut costs and stop prices falling
Firm in oligopoly are ___dependent
Inter
What can we expect in a competitive oligopoly?
the firms compete
• Price war
• Stable/sticky/rigid prices & non-price competition
What can we expect in a collusive oligopoly?
The firms act as a monopoly and make agreements together on pricing and output
• Tacit/informal; unspoken, hard to detect; may be due to price leadership
• Overt/formal/cartel; usually illegal; firms can face considerable
consequences if caught
Examples of non-price competition strategies?
• product differentiation
• advertising
• marketing
• product innovation
• loyalty schemes
• customer service
• special offers
• free gifts etc.
What is Collusion?
Collective agreement between firms which restrict competition
What is Overt Collusion?
Firms openly fix prices, output etc; overt collusion is illegal and can result in big fines and prison sentences.
What is Tacit Collusion?
‘Behind the scenes’ agreements
What is Price Leadership?
Firms adjust their prices in line with the actions of the market leader
What conditions are needed for an Effective Cartel?
• Fewer, larger firms involved makes it easy to make an agreement
• High barriers to entry so cartel price cannot be undercut
• Strong branding so consumers stick with goods when price is high
• Easy to monitor each firms’ output to ensure adherence to quotas
• Easier when demand is not volatile which could affect quotas chosen
• Easier if firms have similar cost structures (a very efficient firm could be reluctant to join a cartel)
• Demand is price inelastic; setting a high cartel price does not impact
demand much
• Easier if there is a dominant firm leading the group
• Weak industry regulators and competition authorities
What is Whistleblowing?
A firm involved in cartel behaviour has an incentive to reveal the anti-competitive practices; it may avoid fines imposed on other firms.
Why is Cartel Behaviour often unstable?
• There is an incentive for a firm to ‘cheat’ (and increase output, which
would bring the cartel price down) if there is no credible threat or risk
• Supernormal profits may attract new firms if barriers to entry are not
high enough destabilising the agreement
• If market demand falls, there may be over-capacity putting downward
pressure on the price
• Regulatory and competition authorities use the law to break them up
• There is an incentive to whistle-blow
Costs of Collusive Behaviour?
• Damages consumer welfare (higher
price)
• Absence of competition reduces
efficiency
• Reinforces monopoly power
Benefits of Collusive Behaviour?
• Industry standards can increase some social welfare
• Could help offset monopsony power by suppliers in cooperatives
• Profits may be used to improve dynamic efficiency
