Oligopoly

What are the characteristics of an oligopoly

Few firms dominate the market - (High concentration ratio)

Goods are differentiated

Price makers

High barriers to entry

Interdependence - Firms make choices based off actions and reactions of the rival firms. So because of that there is price rigidity

Non price competition as prices are sticky

Profit max not sole objective as firms are in a dogfight for market share

Examples of oligopolies

UK supermarkets

UK airlines

UK energy providers

Draw the oligopoly diagram

Explain it

If firm rises their price then consumers just switch to alternatives and this firm loses out massively on market share - smaller profit

If firm drops price the other firms follow suit so even though they gain a few customers it won’t be many as the competing firms will match the price and so customers won’t switch

What are the conclusions of an oligopoly

Price competition - less price competition

However lots of non-price competition through advertising, branding, quality

Interdependence is bad for firms (Lack of price competition) so firms are very tempted to collude

What is overt collusion

Where firms agree together to fix prices high forming a cartel

This is illegal

What is tacit collusion

Unspoken understanding to not engage in price wars as it will lead to everyone losing profit

Not illegal does not form cartels either