Oligopolies

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Define oligopoly
A market structure where there is a small number of firms in the market and each firm is interdependent of another
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What are the key assumptions of an oligopoly
That supply is concentrated on a few firms, they are interdependent, there are high barriers to entry and exit & the products are differentiated
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What are the four types of market conduct
Non price competition, price rigidity, collusion & pricing strategies
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What is non price competition
As goods aren't perfectly competitive they are not homogeneous which compete on price. However they compete on other elements of the marketing mix
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What is price ridgitity
(consider the kinked demand model), If price is raised, the good is price elastic and q drops more, if price is dropped the good is inelastic and quantity doesn't increase by as much. Assumes there is asymmetric knowledge and all firms are interdepen
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What are the weaknesses of the kinked demand model?
There is no explanation of how the price was set, the model only deals with price competition (doesn't consider other elements of the marketing mix), assumes other firms will act in a particular way (may not react)
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Define collusion
Collective agreements either formal or informal (tacit) between firms that restrict competition
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Define tacit (informal) collusion
Where firms collude without any formal agreement (gentlemen agreement) and where there is no specific communication
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Define cartel
A formal agreement between firms to limit competition within a market eg limiting output to raise price (OPEC)
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What are the three conditions for a cartel to work effectively
An agreement must be made, cheating has to be prevented & potential competition must be restricted
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What is the difference between overt and covert collusion
Overt - everyone can see agreement (OPEC), covert is hidden from legal authorities
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What is a form of tacit collusion
Price leadership
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Define price leadership
Where one firm sets its own prices and other firms in the market set there prices in relation to the leader
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What are the three strategies of price competition
Price wars, predatory pricing and limit pricing
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Define price wars
A situation where several firms in the market repeatedly change their prices to out compete other firms and often means that firms make losses
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Define predatory pricing
An anti-competitive strategy in which firms set price below AVC to force rivals out of the market and allow market dominance
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Benefits for consumers from a price war/predatory pricing
Low prices in the short run, may encourage firms to be more productively efficient
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Drawbacks for consumers from a price war/predatory pricing
Prices go up in the long run, less choice as firms are pushed out of market
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Define limit pricing
Where price is set low to deter new entrant from entering the market
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Disadvantages of oligopolies
Reduces customer choice, cartel reduces competition and raises prices, firms cannot enter due to high BTE, potential welfare loss (P>MC)
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Advantages of oligopolies
Highly competitive therefore lowers prices for consumers, can be innovative if they re-invest their abnormal profits, due to kinked demand curve prices stay stable in the long run
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Other cards in this set

Card 2

Front

What are the key assumptions of an oligopoly

Back

That supply is concentrated on a few firms, they are interdependent, there are high barriers to entry and exit & the products are differentiated

Card 3

Front

What are the four types of market conduct

Back

Preview of the front of card 3

Card 4

Front

What is non price competition

Back

Preview of the front of card 4

Card 5

Front

What is price ridgitity

Back

Preview of the front of card 5
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