3.4.4 - Oligopoly

• characteristics of an oligopoly:

  • High barriers to entry and exit
  • High concentration ratio
  • Interdependence of firms
  • Product differentiation
• Oligopoly is where a few firms dominate the market and have the majority of market share, they act interdependently
• Collusion leads to a lower consumer surplus, higher prices and greater profits for the firms colluding.
• Collusion occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce
• Cartels are a form of collusive agreements where firms enter into an agreement to mutually set prices.
• Examples of collusion - Milk price by supermarkets 2002-03

  After a period of low milk, butter and cheese prices, supermarkets such as Asda and Sainsbury’s colluded with Dairy suppliers, Dairy Crest and Wiseman Dairies to increase the price of milk, cheese and other dairy products in supermarkets. After an OFT investigation, supermarkets and suppliers were fined a total of £116m.
• Kinked demand curve

  
• Overt collusion is a formal agreement between firms
• Tacit collusion is an unspoken agreement between firms
• CMA don't like overt collusion as it avoids competition which leads to high prices. This is bad for consumers
• By exposing the other firm in an over collusion, which is illegal, the firm gains immunity and the other firm loses out on profit. This is called whistle blowing
• Price competition

  1. Price wars
  2. Predatory prices
  3. Limit pricing
• The short run shutdown point is where AR (price) = AVC
• Predatory pricing is when firms set their prices lowered than AVC
• Predatory pricing

  • In the short run the firm will make a loss to get competition our of the market
  • In the long run after the competition has left they can increase prices and take over the market
• Limit pricing is when the firm sets its prices low enough so new firms can enter the market
• A price war is when firms try to undercut each other with lower prices. The prices driven down super low and from there only very little profit can be made.
• Non price competition

  1. Advertising
  2. Loyalty cards
  3. Branding
  4. Quality