Oligopoly

characteristics of oligopoly (4)

1. top 4 have more than 40% concentration ratio

2. high barriers to entry

3. products either homogenous or differentiated

4. firms are interdependent

what is concentration ratio and weakness

2-10 percentage firms of market

weakness: does not consider international AND domestic based

two types of oligopoly

collusive + non collusive

what can firms being interdependent lead to

1. collusion

2. price wars

Collusive oligopoly definition and types (5)

agree to decrease competition through sharing info abt price and output decisions

1. price fixing (same price)

2. rigging bids

3. sharing market (u have this i have that)

4. production quotas

5. CARTEL —> make formal agreement to decrease competition so they act as monopoly by set price and output

cartel explain and diagram

formally make agreement to decrease competition by setting price and output, thus acting as monopoly so basically just a abnormal profit monopoly diagram

what is problem with cartels

incentive to cheat bc lower costs may result in price wars

Non collusive oligopoly definition explained by game theory

do not engage in agreements to lower competition

game theory

• firms make pricing decisions in response to competitors

• thus explains incentive to collude —> dominant strategy with least risk

• but could also cheat bc lower costs —> undercut high price

non collusive oligopoly kinked demand curve

oligopoly firms engage in price competition (3)

1. price wars

2. predatory pricing

3. limit pricing

oligopoly firms engage in non-price competition

dont want to compete on price to avoid price wars.

also explained by kinked demand curve if decrease will decrease more

disadvantages of oligopoly (5)

1. allocative inefficiency

2. technical inefficiency

3. consumer higher price

4. colluding so NO INCENTIVE FOR R&D

5. consumer choice stress

advantages of oligopoly (3)

1. colluding so make abnormal profits so R&D

2. economies of scale

3. good quality and wide variety of products