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Essay: Discuss how firms in Oligopoly are likely to
compete with each other
Oligopoly is a market structure in which a few firm dominate the industry, it is an
industry with a 5 firm concentration ratio of greater than 50%.
In Oligopoly, firms are interdependent; this means their decisions (price and output)
depend upon how the other firms behave:
Barriers to entry are likely to be a feature of Oligopoly
There are different models to explain how firms may behave
The kinked demand curve model suggest firms will be profit maxi misers.
Kinked Demand Curve Diagram
At p1 if firms increased their price, consumers would buy from the other firms
therefore they would lose a large share of the market and demand will be elastic.
Therefore, firms will lose revenue from increasing price
If Firms cut Price then they would gain a big increase in Market share, however it is
unlikely that firms will allow this. Therefore, other firms follow suit and cut price as well.
Therefor,e demand will only increase by a small amount: Demand is inelastic for a
price cut and revenue would fall.
This model suggests price will be rigid because there is no incentive for firms to
change the price
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If prices are rigid and firms have little incentive to change prices they will concentrate
on non price competition. This occurs when firms seek to increase revenue and sales
by various methods other than price.
For example, a firm could spend money on advertising to raise the profile of their
product and try and increase brand loyalty, if successful this will increase market
sales. Advertising is a big feature of many oligopolies such as soft drinks and cars.…read more
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Effective punishment strategy's for firms who cheat
7. No effective govt legislation, collusion is illegal in the UK
There is no certainty in how firms will compete in Oligopoly; it depends upon the
objectives of the firms, the contestability of the market and the nature of the product.…read more