Oligopolys

Question 1

What are the features of an oligopoly?

Answer 1

• supply in the industry concentrated in the hands of relatively few firms
• firms must be interdependent - where actions by one firm will have an effect on the sales and revenue of other large firms in the market
• high barriers to entry
• non price competition

Question 2

What is the concentration ratio?

Answer 2

Ratio that indicates the total market share of a number of leading firms in a market or output of these firms as a percentage of the total
High cr = closer to being a monopoly
Low cr = closer to perfect competition

Question 3

Why is there a gap in the MR curve in the kinked demand curve?

Answer 3

There are 2 different demand curves

Question 4

Why does MC continue rising within the gap without affecting P?

Answer 4

As MC continues rising within the gap, the firm absorbs the cost without changing P or Q as SR profits are still maximised

When MC rises above the gap they have to raise P to continue maximising profit

Question 5

What is non price competition for supermarkets?

Answer 5

• ethics
• branding
• customer service
• online retailing
• longer opening hours

Question 6

Weaknesses with the kinked demand curve?

Answer 6

• if a firm reduces prices other firms may follow: this may also not happen and instead have other segments such as loyalty
• if a firm raises prices consumers would buy substitutes but we have behavioural economics such as anchoring
• imperfect information
• where did the original price come from
• ignores effects of non price competition
• few economists now accept the kinked demand curve theory of oligopoly pricing

Question 7

what is collusion?

Answer 7

• collusion is where firms cooperate in their pricing, marketing, R&D and output policies
• it is an attempt by firms to recognize their interdependence and act together rather than compete
• collusion removes uncertainty that accompanies interdependence

Question 8

what are the types of collusion?

Answer 8

explicit and tacit

Question 9

why is collusion difficult to pinpoint?

Answer 9

• sticky prices can be used as an excuse
• is it price leadership
• is it market cooperation

Question 10

what are the problems with collusion?

Answer 10

• agreement has to be reached
• cheating has to be prevented
• potential competition has to be restricted
• legislation

Question 11

what’s the diagram for a collusive oligopoly?

Answer 11

monopoly diagram as they have monopoly power

Question 12

advantages of oligopolies?

Answer 12

• big enough to benefit from econ of scale
• dynamic efficiency
• possibly x efficient
• overt collusion can be good for the market

Question 13

disadvantages of oligopolies?

Answer 13

• price setting ability
• allocatively inefficient
• possibility for collusion
• firms may not have the incentive for dynamic efficiency
• depends on:
• size of firm, concentration ratio, objectives, collusion, behavioral economics
• firms are interdependent so rev may rise or fall through no actions of their own