Oligopoly Flashcards
(20 cards)
What is meant by an oligopoly?
A market structure in which a small number of firms dominate the industry.
What are the characteristics of oligopoly?
- High barriers to entry and exit
- Few firms dominate the market (High concentration ratio)
- Interdependence of firms
- Product differentiation
- Price makers
Why are there high barriers to entry and exit?
- Significant investment required to overtake existing firms
- Existing firms benefit from EoS and brand loyalty.
Are firms price makers or price takers and what does this mean?
- Price makers
- Firms can influence market price due to product differentiation
What is meant by the concentration ratio and what does it need to be in order to be considered an oligopoly?
- Measures the combined market share of the leading ‘n’ firms in a market.
- If the 5 firm concentration ratio is larger than 60%, it is considered an oligopoly.
How do you calculate the n-firm concentration ratio?
Add the market share for the top ‘n’ firms,
- E.g. 25 + 20 + 15 + 10 = 70
What is the significance of the concetration ratio?
- Allows firms and investors to assess the competitiveness of the industry.
What is meant by collusive and non-collusive behaviour?
- Collusive behaviour occurs when firms in an oligopoly cooperate to reduce competition and increase collective market share.
- Non collusive behaviour occurs when firms in an oligopoly compete independently without coordinating actions.
What are the types of collusive behaviour?
- Overt = explicit agreements, which is openly communicated. This is usually illegal and can result in heavy fines.
- Tacit = Firms implicitly (non directly) understand and follow each other’s actions without explicit agreements.
What is meant by a cartel in oligopoly?
- A group of independent firms which collaborate to control production, pricing and marketing of goods and services to maximise profits collectively.
What is meant by game theory: the prisoner’s dilemma?
Where two players may not cooperate, even if it’s in their best interest to do so because they can’t trust each other to also cooperate.
What are the types of price competition?
- Price wars
- Predatory pricing
- Limit pricing
What are price wars?
Firms try to undercut eachother’s prices to increase their market share.
What are benefits and drawbacks from a price war?
Benefits:
- Consumers get lower prices
- Surviving firms gain market share
Drawbacks:
- Loss of choice for consumers if firms leave the market
- Firms lose profit
What are the types of non-price competition?
- Brand loyalty
- Advertising
- Innovation
- Product quality
- Collusion
- mergers
What is meant by non-price comeptition?
Strategies firms use to attract consumers and increase market share without lowering prices.
What is meant by interdependence in Oligopoly?
- Firms make decisions based off the actions of other firms
- Price rigidity / stickiness
Explain Game Theory.
- Each firm has the choice to charge at a high Price (e.g. £1) or a low price (e.g. 90p).
- If both firms charge the high price, they will both make high profit. (If both charge £1, they can both make £3m profit)
- If firm A charges £1, firm B can charge £1 to make £3m profit, or firm B can charge 90p and make £4m profit.
- As soon as one firm charges £1, they are at danger because the other firm can undercut.
- However, if firms break the interdependence, they can collude to both charge £1, therefore they both make £3m profit.
- However, there is still an incentive to cheat the collusion via undercutting, therefore it may not last long term.
What are the benefits and drawbacks of a competitive Oligopoly?
+ Allocative efficiency
+ Productive efficiency
- No EoS
- No dynamic efficiency
What are the benefits and drawbacks of a collusive Oligopoly?
+ EoS
+ Dynamic efficiency
- Allocatively inefficient
- Productively inefficient
- X Inefficient
