Edexcel Economics A-level: Oligopoly and Market Behaviour

Vocabulary practice flashcards covering oligopoly market structures, concentration ratios, collusion, game theory, and price and non-price competition.

Oligopoly

A market structure dominated by a small number of large firms, characterised by high barriers to entry and exit, a high concentration ratio, interdependence of firms, and product differentiation.

Concentration ratio

A measure of market dominance that calculates the combined market share held by the top few firms in a given industry.

Interdependence of firms

A key characteristic of an oligopoly in which the actions and strategic choices of one firm directly influence the behaviour and outcomes of its rival firms.

Collusive behaviour

Action taken when firms choose to work together—such as by agreeing on prices or output quotas—to minimise competitive pressure and maximise their joint profits.

Non-collusive behaviour

Competitive conduct occurring when rival firms in an oligopoly compete rather than cooperate, attempting to grow by seizing market share from each other.

Overt collusion

A formal, explicit agreement between firms (such as price fixing) to reduce competition, which is illegal in jurisdictions including the EU and the US.

Tacit collusion

Collusion that occurs when there is no formal agreement between firms, but coordinated behaviour or unwritten understanding is implied.

Cartel

A formal group of two or more firms that agree to control prices, restrict output, or block new entrants to the market in order to reduce market uncertainty.

Price leadership

A market practice where a dominant firm changes its prices first and competing firms follow suit to avoid losing market share.

Game theory

An analytical framework used to predict the strategic decisions and outcomes of interdependent firms acting with incomplete information about rivals.

Prisoner's dilemma

A classic game theory model showing how two interdependent decision-makers without communication are driven by individual self-interest to a suboptimal outcome.

Dominant strategy

The choice or strategy in game theory that yields the optimal payoff for a player regardless of the strategy chosen by the opposing player.

Nash equilibrium

A game theory concept describing an optimal outcome where each player chooses the best strategy given the other's choice, leaving neither player an incentive to deviate unilaterally.

Price war

A form of intense price competition in which rival firms continuously undercut each other's prices, lowering profit margins for producers and suppliers.

Predatory pricing

An illegal pricing strategy where an established firm prices goods below its average costs in the short run to force rivals out of the industry before raising prices again.

Limit pricing

A strategy where existing firms deliberately set prices below the level that an entering competitor could sustainably afford, thereby deterring market entry.

Non-price competition

Methods of competition—such as branding, loyalty schemes, customer service, extended hours, and advertising—aimed at making demand more price inelastic without cutting prices.

Sunk costs

Past business expenses—such as ineffective advertising and marketing outlays—that are entirely unrecoverable if a firm exits or changes strategy.