Oligopoly Content & Performance Eval Flashcards
What are the characteristics of an oligopoly?
Few firms dominate the market, high firm concentration ratio; differentiated goods; high barriers to entry: brand loyalty, sunk costs; interdependence with rigid pricing shown through kinked demand curve; lots of non-price competition; profit maximization is not necessarily the sole objective.
What factors promote competition in a competitive oligopoly market?
Large number of firms; new market entry possible - firms enter and remove supernormal profits; one firm with significant cost advantages; homogenous goods; saturated market.
What factors promote collusion in a competitive oligopoly market?
Small number of firms; similar costs; high barriers to entry; ineffective competition policy - likely to get away with actions; consumer loyalty - as cheating on collusive agreement by undercutting prices will not increase your market share; consumer inertia - not likely to switch.
What are the pros of competition in oligopolies?
Allocative/productive/x-efficiency gains; job creation as firms need to employ more people to increase output.
What are the cons of competition in oligopolies?
Dynamic inefficiency; creative destruction; anticompetitive strategies; cost-cutting in dangerous areas.
What are the cons of collusion in oligopolies?
Absence of competition leads to productive and x-inefficiency; inequality due to higher prices burdening the poor more; damages consumer welfare with higher prices and a loss of allocative efficiency; reinforces cartels’ monopoly power, making it harder for firms to enter the industry.
What are the pros of collusion in oligopolies?
PROS OF MONOPOLY
Pharmaceuticals are allowed to collaborate on research; producers colluding to get a higher price for their product; dynamic efficiency - reinvesting profits into R&D; higher pay for workers.
Add: Can achieve satisficing objectives
-Cross-subsidation (restore Welfare for poorest)
-Environmental charity/investment
What does game theory show in the context of oligopolies?
Interdependence; temptation to collude; dominant strategy to reach Nash equilibrium.
