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What is oligopoly?
A market or industry containing a few firms
What is a concentration ratio
Measures the market share of the biggest firms in the market. For example, a five firm concentration ratio measures the aggregate market share of the largest five firms.
What is market conduct?
The pricing and marketing policies pursued by firms. This is also known as market behaviour, but is not to be confused with market performance, which refers to the end results of these policies.
What is the market conduct in oligopoly?
An oligopolistic firm affects its rivals through its price and output decisions, but its own profit can also be affected by how rivals behave and react to the firm's decisions.
Suppose for example, the firm reduced its price in order to increase market share and boost profit. Whether the price reduction increase or reduces the firm's profit depends on the reactions of the other firms.
How is interdependence and uncertainty relevant in oligopoly?
Competitive oligopoly exists when the rival firms are interdependent in the sense that they must take account if each other's reactions when forming a market strategy, but interdependent in the sense that they decide their market strategies without cooperation or collusion.
As a result, uncertainty is a characteristic of competitive oligopoly; a firm can never be completely certain of how its rivals will react to its price, marketing and output strategy.
What is non collusive oligopoly?
When firms act interdependently in the sense the do not form agreements with each other.
What is a cartel?
A collusive agreement by firms, usually to fix prices. Sometimes there is also an agreement to restrict output and to deter the entry of new firms.
What is the benefit of cartels for firms?
Cartel agreements enable inefficient firms to stay in business, while other more efficient members of the price ring enjoy abnormal profit. By protecting the inefficient and enabling firms to enjoy an easy life protected from competition, cartels display the disadvantages of monopoly.
What are the disadvantages of cartels for firms?
Cartels are usually without the benefits that monopoly can sometimes bring, namely economies of scale and improvements in dynamic efficiency.
Why can consumers benefit from cartels?
Some forms of cooperation between firms may be justifiable and in the public interest, such as joint production development such as between the ford fiesta and the Mazda 2, using many of the same parts.
What is the kinked demand curve theory?
The curve theory can be used to illustrate how a competitive oligopolist may be affected by rivals' reaction to its price and output decisions. The theory was originally developed to explain alleged price rigidity and an absence of price wars in oligopolistic markets.
Explain a kinked demand curve?
(page 148) A raise in price on the kinked demand curve means a significant fall in the demand as other firms will have not changed their prices and will stay at P1. So the firm who has increased price will lose market share and total revenue. The reactions of other firms would be not to react and gain market share due to interdependence.
Decrease in P1 means that demand will increase but not by much as the reaction from other firms would be to also lower their prices to protect their market share. Total revenue will decrease and over time there will be no change in market share.
What are some criticisms of the kinked demand curve theory?
- It is an incomplete theory, as it doesn't explain why a firm choses to be at point X to start with
- Evidence provided by the pricing decisions of real world firms gives little support to the theory. Evidence shows that oligopoly prices tend to be stable when demand conditions change in a predictable way, but they will usually raise or lower prices quickly, by significant amounts, both when production costs change substantially and when unexpected shifts in demand occur
What are some advantages or oligopoly?
- Just like monopoly, firms benefit from economies of scale, which means they can become more dynamically efficient and can pass on cost cuts as low prices to consumers
- With only a few firms available from which to buy, it will be easy for consumers to compare and choose the best option for their needs
- Provided there is a degree of competition, oligopolists continuously innovate and develop new and better products
What are some disadvantages of oligopoly
- Oligopolies restrict output and raise prices, compared to a more competitive market
- Cartels are a bad form of market structure, combining the disadvantages of monopoly (high prices, productive and allocative inefficiency and lack of choice) with few if any benefits
- Small, competitive and innovative firms may find it difficult to enter the market
- The producer rather than the consumer end up 'being king', with producer sovereignty rather than consumer sovereignty ruling the market
What is price leadership?
The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market
What is price agreement?
An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service
What are price wars?
Occurs when rival firms continuously lower prices to undercut each other
