Oligopoly
- Created by: s.waterhouse
- Created on: 28-05-17 16:12
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- Oligopoly
- Concentration ratio
- Measures the level of dominance in concentrated markets
- n-firm concentration ratio = combined revenues of n biggest firms / market worth x 100%
- Definition
- Market structure
- Industry dominated by a few firms
- A small number of firms have a large concentration ratio
- High barriers to entry
- New firms cannot compete away supernormal profits
- Firms offer differentiated (similar but not identical) products
- Industry dominated by a few firms
- Behaviour of firms
- Firms are interdependent
- Actions of each firm will have some effect on others
- Firms use competitive or collusive strategies
- Make interdependence work to their advantage
- Firms are interdependent
- Market structure
- Competitive behaviour
- Various firms do not cooperate
- Firms compete (especially on price)
- More likely when...
- One firm has lower costs than others
- There is a large number of big firms in the market
- Hard to know what other firms are doing
- Firms produce very similar products
- There are lower barriers to entry
- Can achieve high levels of efficiency
- Various firms do not cooperate
- Collusive behaviour
- Various firms cooperate with each other
- Especially over prices being charges
- More likely when...
- All firms have similar costs
- There are relatively few firms in the market
- Easier to see what firms are charging
- There is brand loyalty
- Customers are less likely to switch firms even when prices are lower
- There are higher barriers to entry
- Formal collusion
- Involves an agreement / price fixing between firms (cartel is formed)
- However, unlikely to occur
- Usually illegal
- Informal collusion
- Happens without a specific agreement
- Firms know it is in best interests not to compete
- However, likely to be temporary
- One firm will cheat and lower prices to gain an advantage
- Likely to trigger a price war
- One firm will cheat and lower prices to gain an advantage
- Firms may be able to act as price price leaders
- Set a pattern for others to follow
- Non-price competition could lead to dynamic efficiency
- Could lead to product innovations and improvements
- Unlikely to have very high prices
- High prices provide incentives for more firms to join the industry even if barriers to entry are high
- Various firms cooperate with each other
- Collusive = Similar to monopoly
- Higher prices and restricted output (underconsumption)
- Allocative and productive inefficiency
- Firms in collusive oligopolies do not lower prices so make supernormal profit at the expense of consumers (see diagram)
- Firms set prices at PM and the level of output at QM to maximise profits for the industry (MC=MR)
- They agree output quotas where supernormal profits can be made
- Other firms breaking into the market may face predatory pricing tactics
- However, firms may still compete
- Differentiated products
- Sales promotions
- New export materials
- E.g. Lloyds Group, Barclays, the Royal Bank of Scotland (RBS), and HSBC in UK banking
- E.g. Big Six energy companies
- British Gas, EDF Energy, EON, NPower, Scottish Power and SSE
- Concentration ratio
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