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Oligopoly (T.O.T.F) Flashcards

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1
Q

What is the definition of an oligopoly market

A

A small number of of firms each with a degree of market power (ability to influence price and quantity)

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2
Q

What type of profit do oligopoly firms make in the long run

A

Supernormal profit

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3
Q

Why do firms in oligopoly make supernormal profit in the long run

A

Strong barriers to entry

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4
Q

Give 3 examples of oligopoly markets

A

Supermarkets
Banks
Network providers

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5
Q

How can we measure oligopoly power

A

Using concentration ratios which includes adding up the market share of the biggest firms

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6
Q

Oligopoly firms are characterised by interdependence, what does this mean?

A

This means that firms must consider the reactions of competitors to their strategic decisions and how they might have to react to decisions by other firms

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7
Q

What are the two strategic decisions which can be taken by oligopoly firms

A

Collude or Compete

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8
Q

What does competing usually mean for oligopoly firms

A

A price war

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9
Q

Why is a price war bad for oligopoly firms

A

A price decrease initiated by a single firm is matched by all firms and therefore all firms make less profit

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10
Q

In what scenario is competing strategically effective for oligopoly firms

A

Competing is only effective if it results in firms permanently increasing their market share at the expense of rivals

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11
Q

During oligopoly competition, what are the two ways that a firm may permanently increase its market share at the expense of rivals

A
  • A competitor may leave a market
  • Consumers may permanently switch brand loyalty
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12
Q

What are two types of collusion

A

Explicit
Implicit

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13
Q

How does explicit collusion arise

A

By firms forming a cartel

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14
Q

Draw the diagram showing explicit collusion

A

Each firm given a quota (O-Qquota)
All quotas added together for individual firms equal total output (O-Q)
By sticking to quota price O0 is able to be charged and each firm makes supernormal profit

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15
Q

Explain how explicit collusion works

A
  • Each firm is given a quota
  • By sticking to the quota, the profit max price is able to be charged (MC=MR)
    -Each firm then makes supernormal profit
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16
Q

What do the total quotas of all firms within a cartel add up to

A

Total output in the market

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17
Q

Why do most cartels fail

A

Due to cheating

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18
Q

What is cheating within a cartel

A

If an individual body decides to produce more than its quota

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19
Q

How are cartels often caught

A

Due to whistleblowers who inform the CMA, incriminating other firms in return for immunity

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19
Q

Why does cheating lead to failure within a cartel

A

When an individual body produces more than its quota, the total the bodies produce more which means supply increases and therefore price decreases, leading to less profit

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19
Q

Who are the CMA

A

Competition and markets authority

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19
Q

What is the price leadership model

A

Involves one firm in the industry choosing to act as a price leader - one firm chooses to raise prices in the expectation that others will follow suit

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20
Q

What is implicit collusion

A

When firms in oligopoly follow the price leadership model

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21
Q

Why do profits rise when following the price leadership model in implicit collusion

Study These Flashcards
A

When prices rise, and as demand overall is inelastic, revenues and profits will rise

22
What happens if other firms dont follow suit when a firm raises its prices
The original 'mover' will lower prices back in line with the others in the market
23
When is price leadership more successful
1- There is a way of indirectly communicating the price to other firms in the market 2- The product is more homogeneous
24
Give examples non price competition
Advertising Brand loyalty Quality
25
When do firms engage in non-price competition
When they do not have the ability/option to collude and they might think that a price war is unwinnable
26
What does the kinked demand curve represent?
Price stability in oligopoly markets
27
Draw the kinked demand curve (basic)
The curve also shows that any fall in price by one firm results in inelastic demand (a less than proportional fall in quantity) This leads to a fall in overall revenue gained This is because the price fall is matched by other firms in the industry and the inelastic part of the D curve represents D in the whole market, which is inelastic
28
What does the kinked demand curve show
Shows how both a price increase and decrease leads to worse outcomes for the firm
29
From the kinked demand curve, what does a rise in price by a firm show
It shows that a rise in price results in elastic demand (a more than proportional fall in quantity)
30
From the kinked demand curve, what does a fall in price by a firm show
Shows that a fall in price by one firm leads to inelastic demand (a less than proportional increase in quantity)
31
Draw the more complex version of the kinked demand curve
32
33
What are the two main aims of competition policy
Promote competition increase efficiency within markets
34
What does competition policy aim to ensure (3)
-Innovation which promotes dynamic efficiency -Price competition -Safeguard of consumers
35
What are the 3 pillars of competition policy
Anti- cartels Market liberalisation Merger control
36
What is market liberalisation
Involves introducing competition in previously monopolistic sectors such as energy, banking and postal services
37
Who appoints a regulator
The government
38
Who is the main regulator in the UK
The CMA
39
What is a regulator
A rule enforcer appointed to oversee how a market works and the outcomes that result for producers and consumers It is their job to impose conditions for pricing and standards of service which need to be maintained through investment and adherence to controls
40
Give a real life example of when the CMA prevented two companies from mergers to align be within the consumers interest
Asda and Sainsburys The CMA said the merger could lead to a 'poorer shopping experience ' As the firms would have the power to drive up prices Activision & Microsoft CMA said the firms will have too much power in a growing market However the head of the CMA got sacked for this reason indicating the CMA were too harsh, as the government stated they were too much of a barrier to growth
41
What is the counter argument as to why a merger forming one larger firm may be in the consumers interest
Economies of scale suggests that prices would decrease due to firms ability to purchase in larger quantities, reducing costs
42
What are three examples of competition policy
De regulation Privatisation Tough laws on anti competitive behaviour Increasing market contestability
43
Give examples of de regulation as a competition policy
- Reducing barriers to entry - Preventing mergers which create a monopoly
44
Give a real example of de - regulation
Laws which introduced competition into the postal services industry
45
Give a real example of privitisation
Circulating shares of royal mail
46
What is the practice of circulating shares called
Stock floatation
47
Give two examples of tough laws on anticompetitive behaviour
-Companies breaching UK competition rules risk fines of up to 10% of global turnover - Senior executives can be jailed if negative outcomes occur due to their actions
48
Give 3 real examples of laws which display market liberation
Deregulation of the Bus Industry (1985) – The Transport Act allowed private companies to compete with public transport services outside of London. Gas Market Liberalization (1996-1998) – The UK opened up the domestic gas market to competition, ending British Gas’s monopoly The Big Bang occurred on October 27, 1986, when the London Stock Exchange (LSE) was deregulated and became a private limited company leading to increased competition and foreign investment. (fixed commissions removed so firms could compete on price )
52
What is the role of competition policy (small sentence describing comp policy/regulation)
Overseeing: Mergers Anticompetitive practices (e.g.Price fixing) Collusive behaviour
53
How does the kinked demand curve show interdependence in oligopoly markets
Above the kink: demand is elastic (flat) If a firm raises its price, others don’t follow, and it loses a lot of customers Below the kink: demand is inelastic (steep) If a firm lowers its price, others match the cut, so it gains little to no market share Hence this price stability is due to the interdependence of firms, hesitating to move from the market price due to these worse outcomes
54
What is an intermediate solution between full on regulation and free market solutions to manage oligopoly behaviour
Increasing market contestability Altering market conditions to make it more competitive Creating the threat of entry through removing barriers to entry which will regulate behaviour of existing firms in the market
55
Give 2 examples of increased market contest ability (intermediate between free market & regulation)
E.g. Airline industry: - Rise of low cost airlines such as Ryanair & easyJet - EV open skies agreement gave new airlines access to take of and landing spots E.g. Rise of Uber & Bolt - Removed the need for some licenses for cab drivers
56
What is the main thing that market contestability improves
Efficiency (all 3)
57
Explain how market contestability enhances allocative efficiency
In a contestable market, even if only one or a few firms exist, the threat of new firms entering keeps prices competitive. If existing firms set prices too far above marginal cost, new entrants could undercut them and win customers. To avoid this, incumbents are pressured to set prices closer to marginal cost, increasing allocative efficiency
58
Explain how market contestability enhances productive efficiency
In a contestable market, the threat of new entrants forces existing firms to produce at the lowest possible cost to avoid being outcompeted. This pressure to stay efficient and cut waste improves productive efficiency, as firms must operate on the lowest point of their average cost curve to stay competitive.
59
Explain how market contestability enhances dynamic efficiency
In a contestable market, firms know that to stay ahead of potential entrants, they must constantly improve — through innovation, better technology, or product development. This ongoing pressure encourages investment in new ideas and processes, enhancing dynamic efficiency over time

Economics (MICRO) (10 decks)

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