Oligopoly

• Collusion - where two firms will work together, rather than competing with each other (both raising prices)

  • mainly illegal
• Overt collusion:

  • Price fixing collusion (illegal)
• Tacit collusion:

  • no formal agreement, but firms closely monitor each other to try and work with each other
• Oligopoly - top 5 firms own over 60% of the market
• Oligopoly characteristics:

  • Few firms dominate the market - high concentration ratio
  • High barriers to entry/exit
  • Differentiated goods - PM
  • INTERDEPENDENCE
  • Non - price competition
• Prisoner's Dilemma: A game in which two or more firms must decide whether to cooperate or compete, with each firm's decision affecting the other firms.
• Nash equilibrium - a position that lasts in the long term and is sustainable for both firms, however is the lower outcome
• Price rigidity - each firm must stick to the price for best possible profit, and thus rely on non price competition
• Cartel - A group of firms that work together to fix prices and restrict output.
• However, collusion may not last in the long term as, firms are incentivised to undercut the other firm to earn more profit, reaching the higher nash equilibrium
• Price discrimination - where a firm charges a different price to different consumers for an identical good
• First degree price discrimination - charging every consumer their maximum willingness to pay (MWTP)
• second degree price discrimination - firms that reduce prices in order to sell spare capacity to increase revenue and meet fixed costs
• third degree price discrimination - when a firm charges based on elasticities of demand eg. age, time
• price discrimination:

  Pros:

  • Dynamic efficiency
  • Economies of scale
  • some consumers benefit

  Cons:

  • Allocative efficiencies
  • Inequality
  • Anti competitive pricing