Oligopoly

• Oligopoly: A market structure in which a few large firms dominate a market
• Characteristics of oligopoly:

  A few dominant sellers

  Interdependent decision - making

  Barriers to entry

  Differentiated products

  Non - price competition
• Non-price competition: A strategy whereby firms compete by advertising to encourage brand loyalty, or by quality or design, rather than on price
• Interdependence: Scenario in which firms base their decision - making on the decisions of other firms in the market
• Kinked demand curve & sticky prices:

  If the business were to raise prices then revenue would decrease as other firms would not follow suit & therefore customers would switch firms -demand is price elastic for a price increase. If the business lowered prices again revenue would fall, since competitors would also have to lower prices. The orginal firm would not gain any new customers (which is why MR becomes negative). Demand is price inelastic for a price decrease. Hence sticky prices likely to occur.
• Collusion: Firms work together to gain an unfair market advantage by fixing pricing or output.
• Overt collusion: When firms openly/formally agree on price, output limits, and other decisions aimed at achieving monopoly profits. It can be legal e.g joint ventures and illegal e.g. cartels
• Tacit collusion: A situation occurring when firms refrain from competing on price, but without communication or formal agreement between them. Firms observe each other and so can lead to price leadership and sticky prices
• Product differentiation: A positioning strategy that some firms use to distinguish their products from those of competitors. Often used when sticky prices exist in a market.
• Methods to differentiate products

  1. Branding
  2. After - sales service
  3. Extra features
  4. Performance & reliability
• Concentration ratio: They measure the market share of the largest firms in an industry. Normally an oligopoly exists when the top five firms in the market account for more than 50% of total market sales. They are used to determine the market structure and competitiveness of a market.
• Advantages of oligopoly:

  1. Firms can be dynamically efficient because they feel their market share is protected​
  2. Price stability in the market - can lead to consumer confidence​
  3. Economies of scale​
  4. Supernormal profits can be reinvested, creating more jobs and new products​
• Disadvantages of oligopoly:

  1. High prices for consumers due to sticky prices​
  2. Firms may not be incentivised to reduce costs -may lead to x-inefficiency​
  3. Firms may become so large that they suffer from diseconomies of scale​
  4. Less choice for consumers​
  5. Likely to be allocatively inefficient -firms are likely to make supernormal profits​
  6. Likely to be productively inefficient - oligopolies are unlikely to operate at the bottom of the ATC curve​
• Kinked demand curve diagram:

  A) MC2

  B) MC1

  C) D=AR

  D) MR

  E) Quantity

  F) q

  G) P

  H) PRICE