Oligopoly (3.4.4) Flashcards
(45 cards)
What is an Oligopoly?
Where there are a few firms that dominate the market and have the majority market share, although this doesn’t mean there won’t be other firms in the market.
What are the four key characteristics of an Oligopoly?
-Products are generally differentiated
-Supply in the industry must be concentrated in the hands of relatively small number of firms (High concentration ratio)
-Firms must be interdependent
-Barriers to entry
What are some examples of industries who operate in an oligopoly market structure?
E.g. Banks, Insurance companies, department stores, supermarkets, petrol retailers, sport stores etc..
What shaped demand curve is there in an oligopoly?
Kinked demand curve
What does this Oligopoly’s kinked demand curve look like?
Slide 26
What does this kinked demand curve show/mean?
It is kinked because if a firm raises its price other firms won’t follow since they know their lower price means they are more competitive. On the other hand if a firm lowers its price other firms will follow since they want to remain competitive. This means the demand curve (AR) starts of price elastic (as firm puts up price others don’t) until it gets to P1 and becomes price inelastic (as firms lower price they do as well).
What does concentration ratio mean?
Reveals what % of the total market share a specific number of firms e.g. five firm ratio
What % of 5 firm concentration ratio would be classed as an oligopoly?
60%
What would a 100% one-firm concentration ratio be known as?
Pure monopoly
What is a pure monopoly?
A market structure in which there is a single seller selling a unique good/service
What % does the UK CMA defines a monopoly as?
When it has more than 25% market share
How do you work out 5 firm ratio?
Slide 27
What is collusion?
When firms make collective agreements that reduce competition. Firms cooperate to fix prices and restrict output
When firms don’t collude what is this called?
Competitive oligopoly
What is an example of a UK industry that is suspected of collusion?
The UK energy market
Is collusion legal?
No it is illegal in the UK as it goes against the Competition Act 1998
Why do firms do collusion?
They know that if a firm lowers their prices to gain new customers it is likely to cause other firms to lower their prices. However, if they work together, they could maximise their industry profits.
Will a firm that has a strong business model and something that sets it apart from other firms want to collude?
They won’t want to collude if they feel they can increase market share and/or charge higher prices than competitors
When does collusion work best?
-Few small firms well known to each other
-Firms aren’t secretive about costs of production
-Production methods similar
-Produce similar products
-Dominant firm which the others are happy to follow
-Market is relatively stable
-High barriers to entry
What are the two main types of collusion?
- Overt
- Tacit
What is Overt collusion?
When firms come to a formal agreement (cartel)
What is a cartel?
When there is a formal collusive agreement which is a group of firms who enter into agreement to mutually set prices. The rules will be laid out in a formal document which may be legally enforced and fines will be charged for firms who break these rules
What is the problem with the cartel?
There is a constant temptation to break the cartel. The more successful the cartel the greater the incentive to break it. It is important for firms to be the first to break it and not the firm who is left to deal with the after effects.
What are the consequences of overt collusion?
-Higher prices for consumers
-Less output in market
-Poor quality products and/or customer service
-Less investment in innovation
