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  • Created by: Clodagh
  • Created on: 23-04-14 11:26
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  • Oligopoly
    • Structure
      • An oligopoly is a concentrated market dominated by a few producers
        • It is measured by the concentration ratio
      • Firms offer differentiated products
      • Entry barriers are usually present and vary in size from one oligopoly to another
    • Examples
      • Electricity generation
      • Petrol retail
      • Washing powder
    • Conduct
      • Oligopolistic markets ensure that firms are interdependent
        • There is no uniquely defined best strategy for a firm to follow because the outcome depends on the reactions of rivals
      • Collusive oligopoly occurs when firms refrain from competition, especially on price, and act as if they were one firm: a joint monopoly
        • Collusion can be undertaken formally through a cartel
          • This is where firms agree a price and a fixed quota of output for each firm
      • Some oligopolists exhibit price leadership, where a major player in the market sets the price and other firms follow
      • Competitive oligopoly occurs when firms compete on price
        • Periodic price wars break out in some oligopolistic markets, and the nature of interdependence makes them difficult to bring to an end because no firm wants to be first to fail to respond to a rival's price cut
    • Collude?
      • Small number of firms
      • Firms have smaller costs
      • High entry barriers
      • Ineffective competition policy
      • Consumer loyalty
    • Compete?
      • More firms (a less concentrated oligopoly)
      • New market entry
      • One firm has significant cost advantages
      • Firms produce homogenous products
    • Evaluation
      • The outcome of oligopoly depends heavily on whether firms operate in a collusive or competitive fashion
      • Collusion produces higher prices, lower output and allocative efficiency
        • This produces market failure
      • Competitive oligopoly produces more efficient and, arguably, more equitable outcomes
        • It seems such markets work fairly well. For example, product differentiation under oligopoly may offer consumers significant choice


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