Flashcards
oligopoly
Cards in this deck (12)
- 1what is an oligopolyWhen a few firms share a large portion of the market
- 2Structural differences- Virtually identical products - Metal, Sugar
- Differentiated products - Cars, soft drinks - 3Features of an oligopolyBarriers to entry - Economies of scale, product differentiation + brand loyalty, lower costs for established firms, intimidation, aggressive tactics
Interdependence - rivals affect decisions - 4What two directions are oligopolies pulled- Collude - Join together to make monopoly
- Compete - Gain bigger industry share (Price competition drives down price) - 5What is collusive oligopoly- Firms agree on output, price, market share, advertising, etc..
- Reduces uncertainty
- Formal collusive agreement
CAPITAL - Maximise profits if acts like monopoly
GRAPH !!! - 6What is Tacit Collusion: Price Leadership- Firms keep to the price set by an established leader (Dominating or largest): Maximise profits MR=MC
OR
- Most reliable one to follow (Barometric firm price leadership): Estimates demand and MR Curve where MR=MC - 7What are Tacit collusion rules of thumb- Don't set MR=MC (immediate loss in profit)
- Prevent competition: Maintain profits into longer term
-E.g. : Price bench marks - Typically used price - raise from one benchmark to another
: Add certain % for average profit on top of average cost - 8Factors favouring collusion- Not secretive about cost + Production methods
-Similar production methods and AC
- Produce similar products - agree on price
- Dominant firm
- Significant barriers to entry
- Stable Market
- No government measures - 9How do we know if we have an oligopoly- Concentration ratio: Sum of the markets shares of the markets largest firm (The choice of can influence the perception of the degree of competition in a market)
E.g.:
- Market A - 15+15+15+15+15+10
- Market B - 35+10+10+10+10+1
If...
C6 - Market A 85% > Market B 76%
C1 - Market A 15% < Market B 35%
- Herfindahl index: Sum of squares of firm shares of all firms in the industry
E.g. :
- H min = 0 - Perfect competition
- H max = 1 - Monopoly
H = 0.5 - Duopoly (Equal size firms) - 10Market Power Key issues- Comes from being able to set prices above the competitive level - Defining the relative market is vital to understanding market power e.g computers
- 11Market Power Key distinguishing factor of market power- Degree of substitutability (Positive cross elasticity of demand)
: Close Substitutes - high cross elasticity (Value = no market power)
E.g. Bottled water, smartphones - 12Oligopolistic behaviour1. Firm interdependence
- Actions of one firm has an impact on the actions of the others
- Uncertainty: If Firm A cuts prices then firm B may cut prices or do nothing therefore firm A can only guess
a) Make collusion attractive (Price fixing, Set output prices)
b) Oligopolistic price competition either: Short run losses but long run profit (Good for firm) OR drive industry prices down (Good for consumers)
c) Price wars - Protect increase market share, short-lived
2) Non- price competition
- Advertising, product differentiation
- Brand loyalty: Demand inelastic (Increase in prices)
E.g. Mobile phones, loyalty cards
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- Flashcards on oligopoly, created by saraguild1 on 11/05/2015.
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- saraguild1
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