Oligopoly

Concentration ratio of oligopolies

• 60%+

Oligopoly characteristics:

• Few dominant firms

• Interdependence

• Non-price competition

• Barriers to entry

Few dominant firms

Dominated by small number of large firms, each with large % market share

Interdependence

Each firm’s prices and decisions directly impact the profit of its rivals- firms closely monitor and react to each other’s actions

Non-price competition

Advertising, customer service, quality improvement to gain a competitive edge

Barriers to entry

High barriers to entry, difficult for new firms to enter and compete (economies of scale, limit pricing, patents, branding, sunk costs, legal)

Barriers to entry (what makes it difficult for new firms to enter

• Economies of scale

• Limit pricing

• Patents

• Branding

• Sunk costs

• Legal

• Economies of scale (can be innocent/strategic)

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  • Firms expand and can produce more for cheaper  through investment… (innocent)

  • Vertical integration to control suppliers or threaten so they don’t supply to new firms (strategic)

• Limit pricing (strategic)

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  • Firms purposely lower prices and profits to make new firms unable to compete with low prices and leave market -  stop new firms from entering when see earning supernormal profit

  • Set price below AC of rival, but above own AC

• Patents (strategic)

• Brands copyright an idea, other firms need to pay to use it

• Sunk costs (innocent)

• High set up costs when starting

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• Legal (innocent)

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  • Permit and license costs

Non-price competition in oligopolies:

• Advertising and branding

• Quality

• Endorsement

• Product placement

• After-sales service

• Advertising and branding

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  • Builds trust, encourages consumer loyalty, advertising is communication with customer

• Quality

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  • Helps justify premium price, may be perceived as higher quality than competition (differentiate)

• Endorsement

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  • Celebrities use and encourage purchasing of product (boosts brand loyalty and sales)

  • Risk if celebrities become controversial

• Product placement

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  • Raise brand awareness by placing in movies/tv shows

  • Risk negative perception (bad characters use..)

• After-sales service

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  • Treatment that makes consumers join for experience, not just product (extra benefits)

  • May add on extra cost, x-inefficiency?