Oligopoly

Question 1

define oligopoly!

Answer 1

a market form in which the industry is dominated by a few/small number of sellers

Question 2

give examples of oligopolies in Ireland !

Answer 2

mobile phones
retail banking
petrol companies
supermarkets
newspaper industries

Question 3

what are the characteristics of an oligopolistic market?

Answer 3

• few large sellers in the industry
• interdependence between firms
• barriers to entry
• product differentiation
• collusion may occur
• high degree of knowledge exists
• mostly aim to maximise profits
• more non-price competition then price competition

Question 4

explain the kinked demand curve of oligopolistic firms!

Answer 4

the AR is kinked due to Price Rigidity.

if a firm raises their P above P1 they will lose costumers as other firms will keep their P lower

if a firm lowers their P, other firms will follow - resulting a lower AR for everyone.

no tendency for P to change

non-price competition : advertising, free gifts, quality…

Question 5

what is price rigidity?

Answer 5

a situation where the price of a good does not change immediately or readily to the new market clearing price when there are shifts in the demand and supply curve.

Question 6

explain the kinked MR curve of oligopolistic firms!

Answer 6

due to Price Constancy.

when the MR rises by a small amount, the new profit-maximizing position (MC2 = MR) results in the exact same P and Q as the old equilibrium position (MC1 = MR)

this is why the Mr curve contains a vertical section.

Question 7

what is price constancy?

Answer 7

the reluctance of a firm in oligopoly to change prices because the cost of doing so exceeds the potential gain in profit

i.e. no tendency for prices to change

Question 8

what types of collusion can exist in oligopolistic markets?

Answer 8

1. PRICING POLICY/LIMIT PRICING
   forcing unwanted entrants out of the     industry
2. PRODUCTION/OUTPUT POLICY
   limit output
3. SALES TERRITORIES
   divide up the market (cartels)
4. IMPLICIT COLLUSION
  do not provoke their rivals by cutting prices, they rather engage in non-price competition

Question 9

what is the dominant firm model?

Answer 9

there is one price leading firm which sets the prices which are simply taken by smaller firms.

Question 10

pursuing objectives other then profit maximisation ?!

Answer 10

1. GOVERNMENT INTERVENTION
   companies might fear to attract government intervention that would restrict their activities.
2. MANAGERS NOT OWNERS
   salaries may be fixed and unrelated to performance. e.g. state companies
3. LIMIT PRICING
   may not want to encourage new entrants
4. SATISFACTORY PROFIT LEVELS
   enjoy more leisure and family time
5. MANAGERS MAY PURSUE INCREASED SALES
   managers saleries correlated to sales rather then profit, banks tend to lend to firms with increasing sales, prestige/status, larger workforce

Question 11

Williams baumlos model of sales maximisation

Answer 11

non-profit-maximising behaviors in 1959,

size of the company is more important to the advancement of their own career rather than maximilisation profits

Question 12

do you believe that the Irish retail market for banking services (e.g. personal currents accounts) operate under oligopolistic conditions?

Answer 12

yes, because

1.FEW SELLERS
relatively few banks, e.g. AIB, bank of Ireland, permanent TSB

2.INTERDEPENDANCE BETWEEN FIRMS
they take into account the likely reactions of their competitors

3.CLOSE SUBSTITUDES
competitive advertising and heavy product loyalty promotion