Flashcards
Oligopoly Flashcards
Cards in this deck (15)
- 1Oligopolymarket dominated by 2-10 large firms who have combined high market share. Eg supermarkets.
- 2characteristicsproducts can be homogenous or differentiated
higher barriers to entry can occur due to EoS/branding
businesses invest heavily in advertising and branding even for homogenous products
These markets tend to be associated with price stability/price wars.
firms are interdependent and behave strategically. Base decisions on behaviour of other firms. - 3Kinked Demand Curve TheoryA non-collusive theory which explains price stability based on the shape of the demand curve.
Suggests that if a firm put price above p1, no competitors will follow as revenue would not increase and firm would lose substantial market share.
If a firm puts its price below p1, then all competitors will follow and it will not influence market share. TR will fall here too. Best to keep price the same. - 4Collusioncollusion occurs when producers/firms formally or informally limit competition between themselves to restrict output and raise price. They act as one. Make abnormal profit in the same way a monopoly does.
Collusion theories explain price stability - 5Formal collusionIllegal/criminal
firms have written/verbal agreement to act as one to price fix an rig bids.
These are cartels. - 6informal collusionFirms copying each others behaviour, called price leadership. In some markets there is barometric price leadership, when there is a clear market leader and all other firms follow.
- 7Why does collusion happen in oligoplymarket dominated by who act strategically. Forming a cartel is easier
product can be homogenous and firms have similar cost base. therefore prices and profit margins are similar
Higher barriers to entry prevent competitors entering the market and disrupting the cartel. Often cartel members use anti competitive pricing to keep out competition.
Market size tends to be stable - 8why are cartels unstablefalling demand which creates excess capacity might encourage firms to cheat to take market share away from other cartel members.
Entry of non-cartel firms into the industry might force them all to be more competitive
Intervention/discovery - CMA grants leniency to whistle blowers which might tempt a member of the cartel to disclose.
Game theory - The Prisoner's Dilemma, this suggests that firms acting in their self interest are likely to cheat if they do not trust rivals not to cheat. However if they do come together they could joint profit maximise, which could lead to better outcome for the group. - 9Oligopoly and efficiencyCartels acting as a monopoly have the same advantages of a monopoly.
- 10the CMACompetition and markets authority are a government authority working to promote competition for the benefit of consumers.
- 11evaluate competition policyhard to know as hard to detect cartels
1988 competition act has been toughened and allows -
down raids on company premises
leniency for whistleblowers
harsher financial penalties - up to 10% of global turnover.
5 years in prison
it is underfunded and understaffed - investigations often go on too long
businesses soften employ best lawyers - CMA has lost some v high profile cases
CMA also responsible for regulation of privatised utilities and some criticise the poor quality and high prices
political interference - CMA is supposed to independent of government and there are sometimes suspicions that government ministers intervene.
Some decisions have been criticised: Asda and Sainsbury's - 12what are price warsalthough price stability is the usual behaviour as explained by collusive and non-collusive theories of oligopoly, in some markets price wars occur. These happens when firms competitively reduce price as a strategy.
- 13MotivesDestroyer pricing - to drive out a competitor by undercutting them - to succeed the firm must have resources to bare losses for longer than usual
To gain market share in saturated markets, which are not growing overall. The only way to raise TR is to pinch market share from rivals
loss leaders - some firms may sell products at a loss to encourage other impulse buys of complementary goods
Kinked demand curve - copying other firms - cannot let rivals get ahead. - 14consequences of price wars for consumersIn the short run may benefit due to lower prices, but in long run there may be less choice if a firm is driven out of the market, and prices may be higher than previously to recoup profits.
Some price wars are fake. Some firms have perpetual discounts and claim lower prices even though these prices are the norm. Against consumer law. Some firms may discount some items and increase other to maintain profit margins - 15competition act 1998the main form of competition law in the UK. Provides framework for dealing with restrictive business practise and abuse of dominant market position.
Information
- Description
- Highers Economics (MicroEconomics) Flashcards on Oligopoly Flashcards, created by anna boyd on 16/01/2019.
- Created by
- anna boyd
- Views
- 0
- Rating