unit 3 oligopoly

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  • Created on: 19-01-13 17:04
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Features of Oligopoly
An industry which is dominated by a few firms.
a five firm concentration ratio of more than 50% (this means they have more than 50%
of the market share)
Interdependence of Firms, firms will be effected by how other firms set price and
Differentiated Products, advertising is often important
How Firms In Oligopoly are Expected to behave
There are different possible ways that firms in oligopoly will compete and behave this
will depend upon:
the objectives of the firms e.g. profit max or sales max
the degree of contestability i.e. barriers to entry
government regulation
Overt: communicated
Tacit: un-communicated
Break down due to incentives to cheat, over production, lower market demand,
entry of non-cartel firms and exposure by authorities
The Kinked Demand Curve Model

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This assumes that firms seek to maximise profits
If they increase price, then they will lose a large share of the market because they
become uncompetitive compared to other firms, therefore demand is elastic for 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.…read more

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The price and output in oligopoly will reflect the price and output of a monopoly. The
Quantity QM will be split between the firms in the cartel.
Economics of Game Theory
the study of strategic interaction where one player's decision depends on what
the other player does
What the opponent does also depends upon what he thinks the first player will
Examples of Game Theory
1. Both players have a dominant strategy.…read more

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If P2 chooses left P!1will choose UP
If p2 chooses right P1 will choose UP
Therefore UP is a dominant strategy for P1
P2 will always choose right no matter what P1 does
The unique equilibrium is (up, right). This is despite the fact that (down, left) is pareto
2. One player has a dominant strategy
Push lever wait for swill
Push lever 8,-2 1,7
Wait for swill 10,-2 0,0
1. piglet will always wait
2.…read more

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This is a NASH equilibrium
Prisoners dilemma
Player B
Confess Deny
Confess -3,-3 0,-6
Player A
Deny -6,0 -1,-1…read more



This is a 4 page summary of oligopoly which looks at what it is, collusion, kinked demand curve and game theory. A useful set of notes.

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