The Theory of Oligopolies - Chapter 5

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  • Created by: sammilaw
  • Created on: 16-11-15 10:20
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  • The Theory of Oligopoly
    • Chapter 5
    • Barriers to entry:
      • Research & Development
        • Firms use this to create products which give them an edge over competitors
      • Branding
        • Manufacturers stress that their brands have unique characteristics
      • Multiplicity of brands
        • Large firms have the ability to stock multiple brands
          • more choice and caters to consumers who brand switch
      • Integration
        • Oligopolists can integrate  - allows them to use their size and EoS to limit pricing
      • Predatory pricing
        • Setting a price which may bankrupt a competitor
      • Advertising
        • Large firms can spread FC of advertising across many units - lowers the unit cost
      • Non- price competition
        • i.e. loyalty cards or BOGOF
    • Pricing techniques
      • Transfer pricing
        • i.e. a parent company in a high tax country opening a subsidiary firm in a lower tax country
          • The parent firm pays the other firm (transfer pricing) to use their intellectual property
            • So less funds are being taxed overall as the parent firm is paying less tax
              • 3
            • 2
          • 1
        • i.e. Amazon and Starbucks
      • Cost plus pricing
        • When a firm adds a mark up to average cost i.e. 50%
        • The diagram suggests that firms may find it easier to carry out cost plus pricing once it has achieved the MES (as costs are fairly constant)
        • Popular in retail industry i.e. bridal dresses (200%)
        • BUT does not take into account the elasticity of the product
    • Assumptions
      • Product branding
        • Product differentiation
      • Entry barriers
        • Maintains supernormal profits for dominant firms
      • Interdependent decision making
        • Must take into account the likely reaction of rivals to changes in price and output
      • Non-price competition


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