Week 3 - Oligopoly

What is an oligopoly

Market dominated by a small number of firms

Characteristics of Oligopolies

1. Barriers to entry

2. Few firms

3. Interdependence

4. Products can be differentiated or identical

Profits depend

on actions of other firms

Why is threat of competition important

Already existing firms competing 

HHI

Sum of squares of each firms share of market sales

HHI Value of oligopoly?

1800

HHI Of >1000

Concentrated - merger mightnt be allowed

Kinked demand curve theory

Suggests there is price stickiness in the market and firms rely on non-price competition to boost sales/revenue/profit

Kinked demand curve assumptions

1. If firm raises its price, others wont follow

2. If firm lowers its price, others will follow

Above price is (Kinked demand curve)

elastic

Below price is (Kinked demand curve)

Inelastic

Dominant firm model

Situation where 1 firm has a large cost advantage over other firms and produces large part of industrys output

Limit pricing

Keeping price below level that would max current profits to ensure future profits are higher than usual

Dominant firms are

price makers

Fringe firms are

price takers

Which firms have little influence over price & Act perfectly competitive?

Fringe firms

How do dominant firms stop entry from fringe firms?

Limit pricing

The more fringe firms in an industry

1. The less market share a dominant firm has

2. Dominant firm has reduced profit

Elasticity of demand of a dominant firm increases as

1. Elasticity of fringe firms supply increases

2. Market share of dominant firms decreases

3. Elasticity of market demand increases

Dominant firms max profit by

Acting like a monopoly