Oligopoly

• Define Oligopoly

   An industry dominated by a few large firms.
• Characteristics of Oligopoly

  • Differentiated Products
  • Interdependence of Firms
  • Dominated by a few firms
  • High Barriers to entry
• What can you use to measure if a firm is oligopolistic?

  Concentration Ratio
• What is the concentration ratio?

  The percentage of market share taken up by the largest firms.
• What is the concentration ratio used for?

  to determine the market structure and competitiveness of the market.
• What is the concentration ratio for Oligopoly?

  When there is a 5-firm concentration ratio of greater than 50%
• What does the interdependence of firms mean?

  Firms will be affected by how other firms set price and output.
• Examples of Oligopoly

  1. Car industry
  2. Pharmaceutical Industries
  3. Newspapers
• Efficiencies of Oligopoly

  • Firms can benefit from economies of scale (lower average costs)
  • Firms operating under kinked demand curve may end up setting price higher than marginal cost - allocative inefficiency
  • If competitive, prices will be lower and therefore more allocative efficient.
  • Likely to be dynamic efficient
• How do firms compete in oligopoly dependents:

  • The objective of the firm
  • Degree of contestability
  • Government regulation
• Different Possible Outcomes for Oligopoly in competing:

  • Stable prices (e.g. through kinked demand curve)
  • Focus on non-price competition
  • Price wars
  • Collusion
• Types of Non-Price Competition:

  • Product Differentiation
  • Advertising and Marketing
  • Innovation
  • Customer Service
  • Distribution Channels
• Types of Price Competition:

  • Psychological
  • Predatory
  • Cost-Plus
  • Price Skimming
  • Price Penetration
  • Limit Pricing