Oligopoly Content & Performance Eval

Question 1

What are the characteristics of an oligopoly? (5-7)

Answer 1

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.

Question 2

What factors promote competition in a competitive oligopoly market? (5)

Answer 2

Large number of firms;

new market entry possible - firms enter and remove supernormal profits;

one firm with significant cost advantages;

homogenous goods;

saturated market.

Question 3

What factors promote collusion in a competitive oligopoly market? (6)

Answer 3

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.

Question 4

What are the pros of competition in oligopolies? (4)

Answer 4

Allocative/productive/x-efficiency gains; job creation as firms need to employ more people to increase output.

Question 5

What are the cons of competition in oligopolies? (4)

Answer 5

Dynamic inefficiency;

creative destruction;

anticompetitive strategies;

cost-cutting in dangerous areas.

Question 6

What are the cons of collusion in oligopolies? (3-some linked)

Answer 6

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.

Question 7

What are the pros of collusion in oligopolies? (4-6)

Answer 7

PROS OF MONOPOLY

Potential for Joint Research and Development (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

Price Stability

Question 8

What does game theory show in the context of oligopolies?

Answer 8

Interdependence;

temptation to collude;

dominant strategy to reach Nash equilibrium.