Oligopoly

Oligopoly

1. Characteristics:

   • Few Large Firms dominate. More than 50% of market share.
   • Elements od differentiated goods, brand loyalty is strong.
   • High Barriers to entry
   • Interdependance, depend on each other in terms of conduct & performance. Kinked

2. A market dominated by a few large firms that are highly interdependent on each other. The barriers to entry are high and the firms are the only suppliers of a particular good/service in the market.

3. Types:

   • COMPETITVE OLIGOPOLY:
     • Firms copete over, consumers, market share, prices.
     • Price & non price competition, advertisement, INC investment in branding, brand loyalty, packaging, after care services.
     • e.g. supermarkets & retailers
     • Price wars, predatory pricing, price discrimination, cost- plus pricing.
   • COLLUSIVE OLIGOPOLY:
     • Firms work together in order to achieve common objectives. Described as cartel.
     • Cost of consumer welfare
     • Gas & electricity, petrol, Banks
     • Price fixing, data sharing, price leadership.

4. Kinked Demand Theory: Interdependance

   • There is an advantage for the first mover and a cost for not responding to the rival’s strategy.
   • Moving form Q1 to Q3 = Decrease in TR. Firm will be operating at price elastic point. The firm loses its customers to rivals with lower price and faces a fall in total revenue.
   • Moving from Q1 to Q2 = Decrease in TR. Firms will be operating at price inelastic point. If one firm reduces prices all firms in the market will reduce price leading a lower overall market price.
   • Best for all firms to keep price at P1, does not lead to fall in revenue. Called STICKY PRICES.
   • LIMITATIONS:
     • does not show how prices were set initially. does not explain where point Q1 could be.
     • asymmetric information between firms and they do not always know their rival’s strategy
     • assumptions that firms and consumers act rationally. different decisions based on their objectives

5. Limitations of Non priced completion:

   • Sunk Costs: Costs of incorporating non-price strategies can be retrieved.
   • Elasticity: Consumers may not be inclined towards the firm despite add-ons/ packages being offered.
   • Can be copied by rival firms: New ideas can easily by copied and implemented by rival firms.
   • High AC for the industry: Since all firms end up following the non-price strategies, there is an increase in the average cost for the industry.

6. Game Theory:

   • An interaction between two firms that uses a payoff matrix to show possible combinations of decisions made by two firms and their potential outcomes.
   • DOMINANT STRATEGY - A strategy that guarantees the maximum possible payoff regardless of the rival’s decision.
   • NASH EQUILIBRIUM - Both firms follow their dominant strategy and results in the best outcome for the overall market.
   • Advertise/ No advertise:
     • he firm that advertises first is likely to benefit from first mover’s advantage at the expense of the firm that does not.
       • If both firms advertise then their payoffs would increase simultaneously but would be lower than their individual pay offs had the other not advertised.
   • LIMITATIONS:
     • Game theory only shows an interaction between two firms.
     • The estimate of the payoffs is down to guesswork and may not be accurate.
     • assumes that both firms are similar and are perfect substitutes for the consumers.
     • firms may have differing objectives and may follow variable strategies in order to achieve these.

7. Collusion:

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