Chapter 5 - Oligopoly

Chapter 5 - Oligopoly

1. Collusion

   • Formal - Cartel, e.g. OPEC
   • Informal - Price leader leads
     • Tacit - follow the norm
     • Barometric - most sensitive
     • Parallel - all change with each other
     • Price leader

2. Barriers to entry

   • Predatory pricing
   • Advertising(sunk cost)
   • Brand loyalty
   • Multiplicity of brands
   • Integration
   • Research and development

3. Pricing techniques

   • Cost plus pricing - LRAC +25%
   • Transfer pricing - sell goods to subsidiary for low profit in high tax country, sell for max profit in low tax.

4. Competitive oligopoly

   • Price stability
     • Kinked demand curve
       • Discontinous region
       • Does not take non price competition into account
       • Inelastic and elastic demand curves
     • Game theory - reaction of competitors, payoff matrix
   • Non price competition
     • Quality of good
     • Customer experience
     • Range of goods
     • Times open
     • Discount cards
   • Zero sum game - market share is displaced in the market, one firms loss=anothers gain

5. Real life examples: Energy industry 6:98 Supermarkets 5:75

6. Either collusive or competitive

   • Prisoners dilemma - payoff matrix
     • BA and virgin airlines

7. EVALUATION

   • collusive(market failure)
     • higher prices
     • lower output
     • allocative inneficiency
   • competitive
     • worse price stability but more efficient

8. interdependence

   • kinked demand
   • cartel