Oligopoly - Market Stuctures

Characteristics of an oligopoly

• Few large sellers

• High barriers to entry/exit

• Differentiated goods

• Interdependence

Collusion

When 2 or more firms agree to limit competition

Overt collusion

A formal agreement between firms

Consequences of overt collusion:

• Fines

  • If a firm blows the whistle they gain immunity from fines whilst their competitor loses profit

Cartel

Several suppliers colluding together to control prices and limit supply in a market.

Tacit collusion

An unspoken agreement between firms

Price competition

Occurs when collusion breaks down and firms can’t come to an agreement

Types of price competition

• Price wars

• Predatory pricing

• Limit pricing

Price wars

When firms try to undercut each other with lower prices to steal the other firm’s consumers

Effects of price wars

• Considerable low market price - Benefits consumers

• Detrimental to a firms profits

Predatory pricing

When firms reduce their prices below their short run shut down price (AVC>AR)

Effects of predatory pricing

• SR: Loss incurred as AR<AVC

• LR: Gets rid of competition, firms can later increase price and take over the market

Limit pricing

When an incumbent firm sets price low enough to limit new firms from entering the market

How do firms use limit pricing to drive out other firms?

Firms use economies of scale to decrease AC and decrease price with low costs

Effects of limit pricing

Smaller startups with no economies of scale won’t be able to make a profit

Price agreement

When firms communicate and agree to fix their prices (leads to overt collusion)

Price leadership

When firms unintentionally tacitly collude to set the same price as one firm in the industry

Non-price competition

The use of non-price factors to differentiate a product/ service and attract consumers

Types of non-price competition

• Advertising

• Loyalty

• Branding

• Quality