What is an oligopoly?
An oligopoly is a market dominated by a few large firms, each holding significant market share and market power.
What is meant by a high concentration ratio in an oligopoly?
It means a small number of firms control a large proportion of total market output or sales.
Why are oligopolies interdependent?
Each firm’s decisions on price, output, and strategy directly affect competitors, leading to strategic decision-making.
How does interdependence influence firm behavior in an oligopoly?
Firms must anticipate rivals’ reactions to their decisions, making strategic planning complex.
What are the two types of behavior firms in an oligopoly can exhibit?
Firms can either compete or collude.
What happens when oligopolistic firms compete?
They act independently, often leading to price wars, lower profits, and more innovation.
What happens when oligopolistic firms collude?
They coordinate actions to maximize joint profits, behaving more like a monopoly.
What is formal collusion?
A deliberate agreement between firms (such as a cartel) to fix prices, share markets, or limit output.
What is tacit collusion?
An unspoken understanding where firms follow each other’s pricing or market behavior without an explicit agreement.
What is a price leader?
A dominant firm that sets the price that other firms in the industry follow.
Why might price wars occur in an oligopoly?
When firms compete aggressively on price, trying to increase market share, leading to reduced profits.
What is non-price competition?
Competing through methods other than price, such as advertising, branding, product quality, and innovation.
Why is non-price competition important in oligopolies?
Because lowering prices can trigger price wars, firms often compete through differentiation instead.
What is collective behavior in an oligopoly?
When firms act together, consciously or unconsciously, to behave like a single monopoly to maximize joint profits.
What are barriers to entry like in oligopolies?
They are relatively high, discouraging new competitors from entering the market.
What are some common barriers to entry in oligopolies?
Economies of scale, brand loyalty, high start-up costs, and control over key resources or technology.
What does the kinked demand curve model explain?
It explains why prices in oligopolies tend to be stable — firms fear raising or lowering prices due to competitors’ reactions.
What happens if a firm in an oligopoly raises its price according to the kinked demand curve model?
It loses many customers to rivals because they are unlikely to follow the price increase.
What happens if a firm lowers its price in the kinked demand curve model?
Other firms quickly match the price cut, leading to a price war and reduced profits.
Why is the kinked demand curve ‘kinked’?
Because demand is elastic above the current price and inelastic below it, causing a discontinuous marginal revenue curve.
What are the advantages of oligopolies for consumers?
Product variety, innovation, technological advancement, and economies of scale that may reduce costs.
What are the disadvantages of oligopolies for consumers?
Higher prices, restricted output, and reduced allocative efficiency if firms collude.
Why might oligopolies not be as bad as they sound?
They can still be competitive, drive innovation, and achieve productive and dynamic efficiency.
What type of efficiency can oligopolies achieve?
High dynamic efficiency (through innovation) and productive efficiency (from economies of scale).
