Ch21 - Oligopoly

• Oligopoly


  A market that is dominated by a few very large producers
• Oligopoly


  • Few firms: market often contains just a few firms
  • Large firms dominate
  • Different products: the products sold by each of large firms will be very close substitutes for each other. However, there are likely to be some difference. E.g. difference in style, size, shape
  • Barriers to entry: they are likely to benefit from barriers to entry. E.g. the set up cost may be very high
  • Collusion: dominant firms set up agreements to restrict competition. For example, firms might agree to share a market geographically
  • Non-price competition: They compete using advertising and promotion such as coupon, loyalty card, free offers. Branding is a common features. This is where firm give products a name, term, sign=> help customers identify more easily
  • Price war: If one firm cuts prices, others in the market have to do the same or they will lose sales. As a result, customers benefit from lower prices in the market. However price wars do not normally last for a long time
• Cartel

  A group of firms or countries join together and agree on pricing or output levels in the markets
• Barrier to entry

  Factors that make it difficult for new firms to enter a market
• Legal barriers


  • Government awards a contract to a single firm to provide a particular service
  • Examples: travel and water supply
• Patent

  • A licence that prevents firms copying the design of a new product or new piece of technology
  • The new product developer can be the sole supplier in the market for a long period.
  • This allows the firm to charge a high price and recover the costs of research and development
• Marketing budgets

  • Monopolists often have strong brand names
  • Makes it difficult for new entrants to compete because their products will be unfamiliar and may not be trusted by consumers
  • Dominant firms often spend large amount of money on advertising to strengthen their brand names
  • Example: Coca-Cola
• Technology

  • If an established and dominant firm has access to complex or up-to-date technology, this can act as a barrier to entry
• High start-up costs

  • The cost of setting up a firm to compete with the existing operators is too high
  • Example: Rolls-Royce is the only producer of jet engines for aircraft in the UK