4.1.3 Oligopoly

What is oligopolistic behaviour

Firms are interdependent

What does interdependence mean

Firms react to rivals actions

What behaviour is common in oligopoly

Price stability

Why are prices stable in oligopoly

Firms fear losing market share

What is a concentration ratio

Combined market share of largest firms

What does a high concentration ratio show

Less competition

What is a 4 firm concentration ratio

Market share of top four firms

Why are UK supermarkets an oligopoly

High concentration ratio

What is collusion

Firms agree to reduce competition

What is the effect of collusion on prices

Prices rise

What happens to consumer surplus under collusion

It falls

Why do firms collude

To maximise joint profits

When is collusion more likely

Few firms high barriers

What is non collusive oligopoly

Firms compete without agreement

When is non collusion likely

Many firms homogeneous products

What is overt collusion

Formal illegal agreement

What is tacit collusion

Informal implied cooperation

What is a cartel

Firms controlling price or output

Give an example of a cartel

OPEC

What is the effect of cartels on consumers

Higher prices

What is price leadership

One firm sets price others follow

Why does price leadership occur

To avoid price wars

What is a price war

Firms repeatedly cut prices

What is the effect of price wars

Lower profits

Why do firms use non price competition

To increase brand loyalty

What does non price competition do to demand

Makes demand inelastic

What is game theory

Analysis of strategic decision making

What does the Prisoners Dilemma show

Interdependence and uncertainty

What is a dominant strategy

Best choice regardless of others

What is a Nash equilibrium

No player can improve outcome

Why is collusion unstable

Incentive to cheat

Give one disadvantage of oligopoly

Higher prices

Give one advantage of oligopoly

More innovation

Why can oligopolies innovate more

High supernormal profits

How do oligopolies gain lower costs

Economies of scale

What is price discrimination

Different prices for same good

What condition is needed for price discrimination

Different elasticities

What is first degree discrimination

Each consumer charged differently

What is second degree discrimination

Different prices for quantity

What is third degree discrimination

Different prices for groups

How can consumers benefit from price discrimination

Cross subsidisation

How do firms benefit from price discrimination

Higher profits