Oligopoly

• Oligopoly definition?


  A market dominated by a few large firms
• Characteristics of olygopoly?

  A few large firms have a large market share

  High market concentration due to high concentration ratios

  Product differentiation occurs

  Non-price competition

  Significant barriers to market entry

  Interdependency

  Long and short run supernormal profits
• Market concentration?


  the degree to which market share is distributed in a market. High concentration means a small number of firms have most the market share
• 'X' firm concentration?


  the proportion of market share that the 'x' largest firms in the market have collectively
• Olygopolist behaviours?


  price leadership, price stability, collusion
• Price leadership?


  One dominant firm, with a larger market share and brand loyalty has market power:

  If it reduces prices, other firms will have to follow to maintain market share

  If it increases prices, brand loyalty means market share remains similar (inelastic demand) so other firms should raise prices- without raising prices they wont gain any extra revenue
• Price stability?


  Occurs when prices are stable for long periods. May also be a tendency for price war: successive competitive cuts to prices to steal market share from competition (destroyer prcicing)

  Damages all firms due to drop in revenue, so only the richest survive.

  Instead, non-price competition occurs
• kinked demand curve?


  A price above P1 is elastic so reduces total revenue

  a price beloe P1 is inelastic so reduces total revenue,

  The MR curve is discontinuous as MR is positive when elastic and negative when inelastic
• Collusion?


  occurs when firms make joint agreements to exploit consumers to increase their own profits.

  The market must be in agreement otherwise undercutting with occur to take market share and supernormal profits

  Explicit collusion- formal agreement

  Implict collusion- informal agreement
• Two types of collusion?


  Raising prices- restricting supply if PED is inelastic, making revenue and profit rise

  Market sharing- firms agree not to compete within each market segement becoming effective monopolists

  Aim for joint profit maximising