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Economics ­ Oligopolies (1/10/12)


The Theory of Oligopoly
Definition = The majority of the market is concentrated in the hands of a few large firms ­
this can be seen in such diverse industries as car production, food processing, banking,
insurance, consumer electrics etc. (Oligopoly is the most common market…

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Formal Collusion = Cartel occurring ­ We are going to control the price in the market (fines
from competition commission if found out)

Tacit Collusion = secretly colluding or when other companies follows suit to what another
company has done (e.g. Tesco put's their prices up so Sainsbury's do it…

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Informal Collusion

Collusion may operate by one of the firms acting as a price leader ­ this firms signals
changes in prices to other firms in the cartel
When the firm raises its price = All other firms in the cartel follow suit

Forms of Price Leadership:

The price leader…

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Barriers to Entry:

Oligopolies desire to keep other firms out ­ barriers to entry may emerge and they may be
based on economies of scale

In the absence of such barriers, Oligopolists may decide to create them in the following
ways:

Limit & Predatory Pricing ­ The firm that has…

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The Kinked Demand Curve:




The Kinked Demand Curve explains price rigidity (why firms keep their prices stable in an
oligopolistic market)

Oligopolistic Firms are Interdependent ­ Concerned about what their competitors are doing

Raising Price Above P1:

Face a very elastic demand curve
A small rise in price = A…

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Marginal Cost:

Can shift up and down without any effect on the level of output or the price
There is no incentive for firms to produce at MC3

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