3.4.4 Oligopoly

Oligopoly

A market structure dominated by a small number of large firms, where each firm's actions significantly impact others.

Characteristics of Oligopoly

Only exists where there are only a few firms in the market, compete on non-price competition, can exploit consumers by charging high prices.

High Barriers to Entry

High barriers to entry and exit in oligopolistic markets.

Interdependence of Firms

Firms take into account the reaction of competitors when making decisions regarding pricing.

Concentration Ratio

Tells us the number of firms that dominate the market; oligopolies have a high concentration ratio.

N-firm Concentration Ratio

Measurement of the market share of the n firms that dominate the market.

Product Differentiation

Trying to make a product different from the competition by adapting the actual product or through advertising and branding.

Unique Selling Proposition (USP)

Something that distinguishes a firm's product from those of its competitors and can allow a firm to charge a premium price.

Collusion

When firms in an oligopolistic market agree to act as one firm to benefit from elements of monopoly.

Benefits of Collusion

Industry standards can improve, excess profit can be used for investment, and it saves on duplicate research and development.

Costs of Collusion

Loss of consumer welfare, absence of competition means efficiency fails, and reinforces monopoly power of existing firms.

Cartel

A formal agreement between firms to collude in the operation of the market, often involving price fixing.

Game Theory

The study of strategies undertaken by firms that operate in interdependent markets.

Nash Equilibrium

Given the strategy of the other players, a firm cannot benefit by changing their own strategy.

Prisoners' Dilemma

A situation that shows why two rational individuals might not cooperate, despite it being in their best interests.

Dominant Strategy

The best strategy undertaken by a player regardless of the strategy undertaken by the other players.

Price Wars

Occur when a firm lowers price to increase market share.

Predatory Pricing

Occurs when a firm attempts to force competition out of the market by setting low prices.

Limit Pricing

Occurs when a firm operates below the profit maximizing output of MC = MR.

Types of Non-Price Competition

Includes promotion, quality, customer service, branding, advertising, marketing policies, and loyalty schemes.

Investment in R&D

Heavy investment is undertaken in oligopoly, creating barriers to entry and reducing the threat of potential entrants.