Oligopoly

Oligopoly

1. few large firms

   • controls 70% of the market => price setter

2. pure & differentiated product

   • advertising is important (informative, persuasive)

3. high BTE

   • artificial/natural (patents, own essential raw materials, technological knowledge, money, brand name loyalty)

4. interdependence between firms

   • each firm is aware that its future prospects depend not only on its own policies, but also those of its rivals => creates uncertainty in market => rigid prices

5. presence of vigorous non-price competition

   • advertising & product differentiation
   • generally avoid price competition => eventually will lead to falling total revenue for all

6. maximising profits (MC = MR)

   • SR
     • supernormal
     • normal
     • subnormal
   • LR
     • at least normal
     • supernormal

7. efficiency

   • allocatively inefficient => produces at P > MC => have welfare loss
   • productively efficient => firm concerned about costs

8. impacts

   • consumers
     • +ve: productive innovation due to incentive to conduct R&D; can enjoy low prices due to PD. -ve: exploits consumers using false advertising; producr differentiation raises costs and prices; smaller output produced in collusive model; price rigidity leads to firms not passing lower prices
   • producers
     • +ve: earns superN profits in LR due to high BTE. -ve: depends a lot on R&D, but it's a gamble and may produce little results and adds to costs
   • society
     • +ve: welfare maxi firms produces at P = MC. -ve: profit and revenue maxi produces at P > MC; persuasive advertising wastes resources
   • govt
     • +ve: superN profits raises tax revenue. -ve: needs to ensure non-price competition is not misleading; intervenes to prevent excessive superN profits; higher monitoring costs to prevent anti-competitive behaviour

9. models

   • collusive
     • why collude?
       • reduces uncertainty
       • avoids high costs of non-price competition
       • avoids price cutting situation => less revenue for all
       • act like a monopolist => revenue increases for all
     • open collusion (cartels): formal collusive agreement that coordinates their production and pricing decisions so that they can earn monopoly profits
       • but it's unstable
         • falling DD creates tension => excessive stocks => profits decreases
         • entry of non-cartel firms raises market SS => price drops
         • there could be cheating as they want to increase profits => increases SS and prices drop
     • tacit collusion (price leadership): watches each other's prices to avoid price wars or competitive advertising
       • dominant price leadership: firms choose same price set by dominant firm
       • barometric price leadership: price leader's prices reflect market conditions in the most satisfactory way
   • non-collusive
     • kinked DD curve
       • assumes that firms will react and follow their competitors' actions
         • if others cut prices => firm will follow => DD curve becomes price inelastic => as consumers don't really change their preferences as pricing still relatively same
         • if others raise prices => firm will not follow => DD curve become price elastic => as consumers would now buy from the one with lower price
     • any changes in price would lead to fall in total revenue => firms reluctant to change prices => price rigidity => non-price competition extensively used