Oligopoly - Edexcel Unit 3

Full notes for Oligopoly Unit 3 A2 Economics Edexcel

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Harry Bindloss
OLIGOPOLY
Oligopoly: A market structure with few firms having large shares of the market. It is only in
this market structure that you are likely to see game theory being applied.
Characteristics:
Market dominated by a few large firms
Therefore high concentration ratio.
Small firms exist but are insignificant (don not affect the market price)
Product differentiation occurs (products are not the same and therefore firms have
some control over price.
There is a lot of non-price competition
There are significant barriers to market entry (High sunk costs) ­ Stops new competition
entering
Interdependency ­ Collusive behaviour
Long run and short run supernormal profits
Allocatively and productively inefficient, therefore don't charge lowest price and don't
supply as much as they could.
Due to high barriers of entry they will continue to maintain these supernormal profits.

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Harry Bindloss
How the market operates:
1. Price Stability: Prices tend to be stable for long periods of time, with a tendency to
periodic price wars. Cuts in prices to steal market share. If firms keep cutting their prices
the end result is damaging to all firms) huge drops in revenues and even profits), some
will go out of business, only the richest firm will survive.…read more

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Harry Bindloss
Increases prices: The market leader will not significantly reduce its market share with a
price increase as it had brand loyal consumers who have inelastic demand. Therefore
other firms do not gain any more customers by not raising prices and lose out on the
extra revenue that could be gained with higher prices.
3. Collusion: Collusion occurs when firms make joint agreements to restrict output and
increase price in order to maximise their joint profits.…read more

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Harry Bindloss
Collusion is deemed to be exploitation of the consumer in order to make supernormal profit.
Therefore it is illegal in the UK and the USA. Firms such as the competition commission
investigate UK markets for such anti-competitive practices. It has the power to prevent
them.
Collusion
Collusion is often a way to move towards joint profit maximisation. If is seen as "anything
deemed against the public interest". HOWEVER this is all normative economics.…read more

Comments

Natasha

Thanks your resources are amazing!

davidsalter

This is an excellent 3 page summary on oligopoly which includes the diagram, collusion and theory. With the same author's revision sheets on monopoly and oligopoly makes a useful set.

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