Oligopoly

Characteristics of Oligopoly

Characteristics of Oligopoly

Few large firms, Interdependence, High barriers to entry, Lots of non-price competition

Interdependence

When the prices of products of one firm directly impact the prices of another

Oligopoly market

when the 5 firm concertation ratio for a market is at least 60%

Possible Barriers to entry

Large capital required on start up, economies of scale, Brand loyalty, regulation (e.g. pharmaceutical market), control of supply/distribution channels

Non-price competition examples

Improving customer service, improving product quality, heavy advertising/brand image, loyalty programmes

Kinked demand graph + explanation/proof of interdependence

Impact of Price Rise → Makes the firm more expensive than rivals → Consumers switch to cheaper rivals → Demand falls significantly, indicating price elasticity → Revenue decreases because the fall in demand outweighs the price increase

Impact of Price Cut → Initially increases demand, revenue and market share → Rivals also cut prices, leading to a price war → Demand becomes price inelastic → Revenue falls as demand is inelastic

(vertical line in MR is a blip in it, if real data was used when AR crossed from elastic to inelastic the MR would drop suddenly to the lower line)

Concentration Ratio

The combined market share of the 3-5 most powerful firms in a market

Price war

When at least two rival firms lower prices on products, in an attempt to undercut the competition and capture greater market share (not profitable for firms as profit often drops significantly)

Concentrated market

One where the concentration ratio is approximately 40% or more