Define oligopoly
A market structure dominated by a few large firms
What are the characteristics of an oligopoly?
- High interdependence between firms
- High concentration of firms in market
- High barriers to entry
- Product differentiation
What does interdependence mean?
Firms’ decisions affect rivals and are influenced by them
Why is price competition limited in oligopoly?
Fear of price wars reduces profits
What is non-price competition?
Competing using branding, advertising, quality, or service
Why is non-price competition common in oligopoly?
It avoids triggering destructive price wars
What type of products do oligopolies sell?
Either differentiated or homogeneous products
What is collusion?
Firms cooperating to reduce competition
What is a cartel?
A formal agreement between firms to fix prices or output
Why is collusion often illegal?
It reduces competition and harms consumers
What is tacit collusion?
Informal coordination without explicit agreements
Why is tacit collusion hard to regulate?
It is difficult to prove
What is price leadership?
One dominant firm sets price and others follow
What is the kinked demand curve model used to explain?
Shows that firms often keep prices stable because one change may lead to reaction from rivals
Why is demand elastic above the kink?
Price rises cause large loss of market share
Why is demand inelastic below the kink?
Price cuts are matched by rivals
Why does the kinked demand curve lead to price stability?
Firms have little incentive to change price
Why is there a discontinuous MR curve?
Different elasticities above and below the kink
Why can costs change without price changes?
MC can move within the MR gap
Why are oligopolies allocatively inefficient?
Price is greater than marginal cost (P > MC)
Why are oligopolies productively inefficient?
Firms may not operate at minimum AC
What are barriers to entry in oligopoly?
Economies of scale, branding, sunk costs, advertising
How do economies of scale create oligopolies?
Large firms have cost advantages over entrants
How does advertising act as a barrier to entry?
Builds brand loyalty and increases sunk costs
