Oligopoly

Question 1

assumptions under oligopoly

Answer 1

1. there is a small number of large firms, who have a high concentration ratio eg 4 major retail banks
2. firms interact with one another, they are interdependent and aware of reactions from competitors
3. all firms produce goods that are close substitutes for one another
4. product differentiation and competitive advertising occurs
5. avoid price competition - prices tend to be rigid or sticky, instead use non price competition
6. there are barriers to entry into the industry
7. aim for profit maximisation, but often have other objectives also
8. collusion occurs

Question 2

collusion

Answer 2

any action undertaken by rival firms to restrict competition between them with a view of increasing their respective profits

Question 3

price competition

Answer 3

firms compete by changing their prices

Question 4

non price competition

Answer 4

when competing firms try to increase sales/market share by methods other than increasing prices
eg:
-branding to create loyalty and recognition
-packaging to make distinctive
-extended opening hours eg 24/7
-special offers

Question 5

why do consumers prefer price competition

Answer 5

1. leads to cheaper prices for consumers
2. the extras included in non-price comp. cause price to go up, decreasing the consumers real income
3. consumers frequently don’t need the offers
4. consumers frequently never cash in coupons received, therefore paying for something they never use

Question 6

benefits of non-price competition

Answer 6

• stability in prices
• better quality as firms compete in quality instead of price
• consumers receive the benefit of advertising ie sponsorship
• consumers are more informed due to extensive advertising
• consumer loyalty is rewarded eg loyalty cards

Question 7

barriers to entry

Answer 7

existing firms may:

• already have the adv. of economies of scale
• practice limit pricing: strategy of setting low prices so that it is impossible and unprofitable for new firms to enter the market
• control the channels of distribution
• practice brand proliferation: sell several brands of the same product to have control over the market eg Gillette and Wilkinson Sword are the same brand, selling razors

Question 8

forms of collusion

Answer 8

explicit - joint decisions in an arrangement known as a cartel
implicit - no formal agreement but may be eg reluctance to engage in a price war

Question 9

examples of collusion

Answer 9

price fixing
limit pricing
agreement to limit supply

Question 10

price fixing

Answer 10

agreement between firms not to compete with each other on a price basis

Question 11

limit pricing

Answer 11

setting the price so low that potential new firms are discouraged from entering the market

Question 12

agreement to limit supply

Answer 12

keep down supply and thus keep up price

eg Organisation of Petroleum Exporting Countries

Question 13

revenue curve: Sweezy model for decreasing prices

Answer 13

an oligopolist faces an inelastic revenue curve for decreasing prices because:
firms interact with each other.
if one firms lowers its price, then all the others, to protect their market share, will do the same.
so no firm will gain any significant extra market share

Question 14

revenue curve: Sweezy model for increasing prices

Answer 14

an oligopolist faces an elastic revenue curve for increasing prices because:
all firms goods are close substitutes
if one firm ups its price, its customers will switch to a cheaper substitute, and the firm will lose a significant share of the market

Question 15

price consistency: the vertical section of the MR curve

Answer 15

firms in oligopoly are reluctant to change their prices, as the incurred costs in doing so outweigh the profits
eg argos printing new catalogues

Question 16

objectives other than price maximisation

Answer 16

• to avoid gov. intervention due to SNPs
• protection of their market share, and leave less for their competitors
• to protect the firms market in case of a future decrease in demand
• by increasing sales and production they can benefit from economies of scale, and produce at min AC

Question 17

baumal model

Answer 17

baumal states that firms may produce the output that creates the greatest revenue instead of profit, assuming the profits reach a min. target level
the target level is met, to keep shareholders satisfied, then the firm can set other objectives, eg maximising sales