Oligopoly

• What are the 4 features of an oligopoly?

  few large sellers

  high barriers

  differentiated goods

  interdependence
• Give an example of high barriers make it difficult for new brands to compete?

  Coca cola and pepsi have high barriers from brand loyalty, so it is difficult for new firms to compete

  High sunk costs can't be recovered, e.g money spent on advertising or R+D can't be recovered
• What are price wars?

  When firms repeatedly reduce their prices below that of their competitors with the aim of offering the lowest price in the market. This benefits consumers but is detrimental to firm's profits
• What is collusion?

  When 2 or more firms agree to limit competition
• What are the 2 types of collusion?

  Overt and tacit
• What is overt collusion?

  a formal agreement between firms
• what is tacit collusion?

  an unspoken agreement between firms
• Why is overt collusion bad?

  competition is avoided leading to high prices and decreases consumer surplus
• In the UK, who makes overt collusion illegal?

  Competition and Markets Authority
• What is it called when one firm confesses to the CMA about overtly colluding with another firm?

  Whistle blowing - allows immunity from CMA's fines
• What is an example of tacit collusion?

  Asda sells baked beans at 20p, so Tesco does the same. If Tesco tries to undercut Asda, a price war will breakout and firms will lose out on profits.
• What type of collusion does price agreement lead to?

  overt
• What type of collusion does price leadership lead to?

  tacit
• What are the 3 types of price competition?

  price wars

  predatory pricing

  limit pricing
• What is predatory pricing?

  a firm cuts down price below ATC to force out competitors. This is below the short run shut down point where AR=AVC. After forcing out competitors, prices can be raised back again.
• What is limit pricing?

  An incumbent firm sets the price low enough to limit new firms from entering. Economies of scale can be used to lower average total costs, which decreases prices. Smaller firms with no economies of scales won't be able to compete.
• What are the 4 types of non price competition?

  advertising

  loyalty cards

  branding

  quality
• Explain how quality works in non price competition?

  supernormal profits (AR>AC) allow for firms to be dynamically efficient and invest into R and D which improves quality.
• What is the reason for uncertainty in oligopolies?

  Decisions by one firm in the industry impact all the other firms
• What is a non collusive oligopoly?

  Firms compete on prices and undercut each other to gain market share.
• is cooperation legal between firms?

  yes
• what is a collusive oligopoly?

  Where firms in an oligopoly industry set the same prices, either through tacit or overt collusion. 
• What is another name for a non collusive oligopoly?

  competitive
• Explain the AR1 and AR2 curves in the kinked demand curve.

  AR1 is flatter and more elastic because if the firm increases their prices, customers will switch to the competitor as a cheaper substitute

  AR2 is steeper and more inelastic because if the firm decreases their price, the competitor will also do that so there won't be a significant change in demand.

  
• How will the MR curves look when added onto the kinked demand curve?

  They will be twice as steep as the AR curves with a vertical section in between the 2 curves.

  
• How will the MC and AC curves look on the kinked demand curves?

  the MC curve intersects the vertical section of the MR curve and intersects the AC curve at its lowest point. The MC and AC curves intersect in between the MR and AR curves.

  
• How do you determine the profit maximising price and output on a kinked demand curve?

  Profit max occurs when M⁢C=M⁢R. This happens at a quantity of X. To find price, we go all the way up to the demand curve and this gives a price of L.

  
• How do you find the average cost of a quantity on the kinked demand curve?

  To find average cost, go up from Qe until you reach the A⁢C and then go across to get an average cost of C.

  
• What happens when the kinked demand curve is in equilibrium?

  there is no incentive for firms to change their prices.
• In an oligopoly, if costs shift upwards what will happen to price and quantity?

  price and quantity remain the same as long as the marginal cost curve only intersects the vertical section of the MR curves because of price rigidity