Oligopolies

• What are the characteristics of an oligopoly?

  High barriers to entry and exit
• How do high barriers to entry affect competition in an oligopoly?

  They make the market less competitive
• What is a high concentration ratio in an oligopoly?

  Few firms supply the majority of the market
• How does interdependence among firms affect their behavior in an oligopoly?

  Actions of one firm affect others' behavior
• What is product differentiation in an oligopoly?

  Firms use branding to differentiate products
• What are the two aspects of oligopoly discussed in the material?

  • Oligopoly as a market structure
  • Oligopolistic behavior of firms
• What does the concentration ratio of a market represent?

  Combined market share of top firms
• How would you calculate the 4-firm concentration ratio?

  Add the market shares of the 4 largest firms
• What is the 4-firm concentration ratio for the UK supermarkets?

  72.8%
• What is the 2-firm concentration ratio for the UK supermarkets?

  45.5%
• How does a higher concentration ratio affect market competition?

  It makes the market less competitive
• What is collusive behavior in an oligopoly?

  Firms agree to work together on pricing
• What are the consequences of collusion for consumers?

  Lower consumer surplus and higher prices
• Why do firms in an oligopoly have an incentive to collude?

  To maximize their benefits and restrict output
• What factors make collusion more likely in an oligopoly?

  Few firms, high entry barriers, similar costs
• What is the difference between collusion and non-collusion?

  Collusion involves cooperation; non-collusion is competition
• What is overt collusion?

  Formal agreement between firms
• What is tacit collusion?

  Implied agreement without formal agreement
• How does the kinked demand curve illustrate price stability in an oligopoly?

  Asymmetric reactions to price changes by firms
• What happens if a firm increases its price in an oligopoly?

  It loses significant market share
• What happens if a firm decreases its price in an oligopoly?

  It gains a relatively small market share
• What are the reasons for non-price competition in an oligopoly?

  • Improve brand loyalty
  • Enhance customer service quality
  • Offer special promotions
  • Increase advertising and marketing efforts
• What is a cartel?

  A group of firms controlling prices and output
• What is price leadership in an oligopoly?

  One firm changes prices, others follow
• What is a price war?

  Firms constantly cut prices below competitors
• What is the significance of barriers to entry in an oligopoly?

  They prevent new firms from entering profitably
• How does game theory relate to oligopoly interdependence?

  It predicts outcomes with incomplete information
• What is the Prisoner’s Dilemma in the context of oligopoly?

  Model showing interdependence in decision-making
• What is a Nash equilibrium?

  Optimal strategy considering opponents' choices
• Why is the Nash equilibrium considered unstable in the Prisoner’s Dilemma?

  Incentive to cheat exists for both prisoners
• What are the advantages and disadvantages of oligopoly?

  Advantages:

  • Significant supernormal profits
  • Investment in research and development
  • Potential for innovation and efficiency

  
  

  Disadvantages:

  • Higher prices and inefficiency
  • Loss of consumer welfare
  • Barriers to new entrants
• How can oligopolies exploit economies of scale?

  By being large, they lower average costs