Oligopoly characteristics

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  • Created by: Jade
  • Created on: 17-11-12 13:15
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  • Oligopoly
    • A market structure dominated by a few large firms
    • Characteristics of an oligopoly
      • High barriers to entry leading to long run abnormal profits
      • Mutual interdependence between competing firms
      • Price rigidity due to risks and uncertainties associated with price competition
      • Intensive non-price competition
      • Periodic aggressive price wars - fights for market share/dominance
      • Profit maximization may NOT be the firm's objective
    • Game theory
      • Seeks to analyze strategic behaviour between firms
      • E.g. enter a price war or keep prices constant
    • Collusion
      • Where firms tacitly or otherwise agree not to compete on prices, service provision and other matters that might adversely affect mutual well-being
      • Tacit collusion: unwritten agreement not to engage in price war
        • NOT ILLEGAL
      • E.g price or output agreement designed to restrict competition
      • Cartel - group set up by rival firms to take common action
        • E.g. agree prices, market share etc
        • ILLEGAL in most countries including the UK
      • Price fixing
        • OFT fined BA £270m for fuel surcharge price fixing
        • ILLEGAL
      • E.g price leadership - where one firm, usually the market leader, increases price and the others follow
        • Informal collusion, no official agreement
  • E.g price leadership - where one firm, usually the market leader, increases price and the others follow
    • Informal collusion, no official agreement

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