Oligopoly characteristics

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  • Created by: Jade
  • Created on: 22-11-12 14:48
What is a oligopoly?
An oligopoly is a market structure dominated by a few large firms
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What is the market concentration like in an oligopoly?
High level of market concentration
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What kind of products do firms produce?
Branded/Differentiated products
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Explain how high start up costs are a barrier to entry in an oligopoly?
High start up costs - these make it difficult for new firms to enter the market - as a result there will be fewer firms in that industry
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Explain how economies of scale acts as a barrier to entry?
Economies of scale with dominant firms buying in bulk (purchasing economies), benefiting from technical, managerial economies etc - this deters new firms from entering the market as they will not immediately be able to benefit from economies of scale
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M____________ I______________ between competing firms
Mutual interdependence
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How are firms within an oligopoly interdependent?
The decisions made by one firm may provoke an action by another, therefore firms are unlikely to make decisions without considering their rival's possible response.
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What is game theory?
Game theory seeks to analyse strategic behaviour between firms
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What is collusion?
Collusion is where firms tacitly or otherwise agree not to compete on prices, service provision and other matters might adversely affect mutual well-being
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What is tacit collusion?
Tacit collusion involves unwritten agreement between two firms to not compete with each other through a price war.
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Give two examples of collusion
A price agreement or output agreement designed to restrict competition, possibly to scare off new firms looking to enter the market. Price leadership, where when one firm, usually the market leader, increases its price and others follow.
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In 2007, some airlines colluded and set high fuel surcharges. Price fixing is illegal, explain what the OFT did to these airlines.
The OFT fined BA £270m for fuel surcharge price fixing.
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What is a cartel?
A cartel is a group set up by rival firms to take common action e.g. Agree prices, market share or exchange information on costs.
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Give an example of informal collusion and formal collusion.
A cartel is an example of formal collusion and is illegal in most countries including the UK. Price leadership is an example of informal collusion
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What is cross subsidisation?
Cross subsidisation is an internal subsidy. A firm uses profits from one activity (e.g. Transatlantic flight) to reduce the price of another product (e.g. European flights).
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Why is cross subsidisation anti-competitive and inefficient?
the price paid does not reflect its marginal cost.
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What are the four major theories about oligopoly pricing?
1. Collude to charge monopoly price. 2. Compete on price so that price and profits are the same as a competitive industry. 3. Prices and profits will be between monopoly and a competitive industry. 4. Oligopoly prices and profits are indeterminate
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The Kinked demand curve - rival firms are assumed to follow a price?
Price cut, (making demand relatively inelastic)
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Rival firms are assumed not to follow a price?
Price increase, (making demand relatively inelastic)
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The kinked demand curve assumes the main aim of an oligopolist is to?
Maintain market share
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If a firm increases price, what will happen to its market share and total revenue?
Firm loses market share and some total revenue
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If a firm cuts price, what will happen to its market share and total revenue?
Little gain in market share - other firms have followed suit. Total revenue may still fall.
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Limitations of the kinked demand curve model
Does not predict price and output but explains price stability. Overlooks non-price competition. Assumes rivals always match price cuts but ignore price rises - they may not. Assumes an oligopolist is keen to avoid a price war.
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Other cards in this set

Card 2

Front

What is the market concentration like in an oligopoly?

Back

High level of market concentration

Card 3

Front

What kind of products do firms produce?

Back

Preview of the front of card 3

Card 4

Front

Explain how high start up costs are a barrier to entry in an oligopoly?

Back

Preview of the front of card 4

Card 5

Front

Explain how economies of scale acts as a barrier to entry?

Back

Preview of the front of card 5
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Comments

davidsalter

23 flash cards for checking your understanding of oligopoly. Can make a break from solid reading.

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