what is an oligopoly
An imperfect market structure dominated by a small number of powerful firms
Concentration ratio
A measurement of how concentrated a market is - the total market share held by the largest firms in a market
When does collusion occur
When firms work together to determine price and/or output
This reduces the uncertainty that may exist among firms in the industry regarding price and output decisions of rivals
What is a cartel
Collusive agreement among a group of oligopoly firms to fix prices/output between them
Overt Collusion
A collusive relationship formed between firms involving an open, formal agreement
Tacit collusion
A collusive relationship between firms formed without any formal agreement being made
Interdependence
How firms in competitive oligopoly are affect by rival firms’ pricing and output decisions
Use of Kinked demand curve
Illustration of why oligopoly tend to have more stable prices and non-price method as of competition
Implications of the kinked demand curve regarding sticky prices and Non price competition
The KDC implies that prices in oligopoly markets are sticky, therefore firms have more incentive to engage in NPC like advertising, marking and branding
or Research into product development = greater dynamic eff and consumer choice
Also possible formation of cartels and collusion, or interdependent pricing strategies
Weaknesses of KDC
No explanation of how original price is determined
The model only deals with price competition and ignores effects of non-price competition, which we know is very common in oligopoly markets
Model assumes a particular reaction by other firms to a change in price by another firm
3 Key points of the Kinked Demand Curve
-Demand curve is kinked, due to asymmetric reaction to price changes in competitor firms (interdependence in oligopoly markets)
-The kink in demand curve creates a ‘gap’ in the marginal revenue curve, so prices are sticky, costs can change near MR gap without changing price
It assumes the oligopoly firms do not collude
How does collusion affect profits
Collusion creates an effective monopoly, maximising joint profits
Types of price collusion
Price leadership - Dominant firms set prices, others follow
Price Agreement - Agreement over prices (usually over a time period)
Price competition
Price wars - Increasing market share or force out competitors by aggressively cutting prices. Beneficial to consumers in SR but harmful in LR
Predatory pricing - Dropping prices below short-run shut down level (illegal) which pushes incumbent firms out of market
Limit pricing - Dropping prices to or above normal profit to deter new entrants to the market
Cooperation in oligopoly
Collusion is likely to be detrimental to consumers, hence it is illegal
However, corporation may be justifiable and in the publics interest
Hence it may be allowed or even encouraged
Example of when cooperation between oligopoly firms was allowed
Pharamaceutical firms working together to develop a COVID-19 vaccine (Pfizer and BioNTech)
Advantages of oligopolies with very few firms that have a high market dominance
Just like a monopoly firms benefit from economies of scale in oligopoly
Means they can become more dynamically efficient and can pass on cost cuts as low prices to consumers
Very few firms available, easy for consumers to compare and choose the best option for their needs. Other markets may offer too much choice for consumers with bounded rationality to make a decision to maximise utility
Advantages of competitive oligopolies
If there is a degree of competition, oligopolistic will have both the abnormal profit and incentive to continuously innovate and develop new and better products i.e. to be dynamically efficient
Advantages of oligopolies overall
Prices are sticky, more long-term certainty for consumers
Corporation can be beneficial for society e.g. Funding R&D to develop products that is too expensive for any one firm to fund individually
Disadvantages of oligopolies
Oligopolies restrict output and raise prices to max profits compared to more competitive markets
Consumer surplus is lost to the benefit of greater producer surplus
In some cases, insufficient competition can reduce dynamic efficiency as less abnormal profit reinvested, settling with market dominance
Prices are sticky, but higher prices than a more competitive market. No incentive for firms to keep costs low or charge low prices, not being statically efficient
Small, competitive,, and innovative firms will struggle to enter the market
How to make a market more contestable
Reduce barriers to entry
Example of oligopoly
Mobile network operations - EE, Vodafone, Three, O2
Concentration ratio of mobile network operations
Only 4 national networks, 100% of infrastructure market
-Vodafone and 3 merger moving toward 3 firm oligopoly, more concentrated
Pricing decisions mobile network operations market
Similar monthly contract prices
Bundled data deals, prices tend to move together
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Nature and purpose of economic activity28
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Economic Resources5
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Scarcity, choice and the allocation of resources8
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The Determinants of the Demand for goods and services27
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The determinants of the supply of goods and services7
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The determination of equilibrium market prices7
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The interrelationship between markets14
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The market mechanism, market failure and government intervention in markets.74
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PPF & Elasticity31
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Production, Costs and revenue54
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Market Structures92
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The distribution of income and wealth49
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Individual Economic Decision Making20
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Oligopoly30
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Price Discrimination18
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Marginal, Average and Total Revenue + Profit18
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Labour Markets96
