1.2.21 Oligopolies

• What is an oligopoly?


  When a market is dominated by a few firms
• What are the features of a Oligopoly?(7)

  Few firms

  Large firms dominate

  different products

  Barriers to entry

  Collusion

  Non-price Competition

  Price Competition
• WHat is the range of firms in an monopoly

  3-7
• How can large firms dominating an oligopoly market affect the price?

  these firms could control a large percentage of the market, and are highly influential in determining the prices
• How can different products in an oligopoly market affect the difference in products? (Different products)

  Products would be close substitutes with some differentiation
• Why do oligopoly markets have high barriers to entry?(2)

  Set-up costs are high, and dominant firms likely discourage entry by investing in their brands

  The rest is the same as monopolies (legal barriers, patents, marketing, budgets, tech)
• What is collusion?


  When dominant firms set up agreements to restrain competition
• What are examples of the agreements that the firms that do collusion? (3)

  Firms could share a market geographically

  price fixing, all firms agree to charge same (high) prices

  Firms agree to restrict output
• What is Non-price Competition in oligopoly markets?

  When firms compete using promotion and advertising
• What are the most common ways that firms do Non-Price Competition?

  Branding

  Brand loyalty

  Product differentiation
• How is Branding used for Non-Price Competition?

  Products are given a name, term, sign or symbol so customers can identify them more easily
• How could firms create brand loyalty?

  Through advertising
• How is product differentiation used to persuade customers?

  firms try to persuade consumers to persuade customers that their brands are different from those of competitors (real or perceived differences)
• How is price competition in a oligopoly market?

  The market leader sets the price and the others follow
• Firms try to avoid/force price wars

  avoid
• What are the advantages of Oligopolies?(5)

  Choice

  Quality

  Economies of scale

  Innovation

  (Threat of) Price Wars
• How is choice an advantage of an oligopoly for customers?(3)

  It ensures that a customer is provided with a choice

  Firms can launch new brands to provide more choice

  In some markets, little choice exists due to the difficulty in differentiating product
• How is Quality an advantage of an Oligopoly?


  Because non-price competition leads to product differentiation, and some might be superior by customers
• How is EoS an advantage of an Oligopoly?

  Dominant firms are usually large and can take advantage of EoS
• How is innovation an advantage of an Oligopoly?

  Large dominant firms -> resources for R&D -> new products to beat out competitors
• How is the threat of price wars an advantage of an Oligopoly?

  Prices tend to be stable, which provides the consumers with certainty about the market
• What are the disadvantages of Oligopolies? (2)

  Collusion

  Cartel
• How is collusion a disadvantage of an Oligopoly? (2)


  Price fixing: firms agree to a higher-than-market price

  Market is shared geographically, consumers in one area have limited choice
• What is a cartel?

  Where a group of firms or countries join together and agree on pricing or output levels in the market
• What are the disadvantages for consumers? (2)


  Firms could choose to invest in advertisement instead of spending on R&D

  Price wars can reduce competition and increase prices in the long term