5.5 Oligopoly

unfinished

Main charecteristics of oligopoly

few firms, high comcentration ratio

price setters

product differentiation

high barriers to entry and exit

interdependence

variation in oligopolies

oligopolistic markets can be very different in relation to the niber of firms, level of interdependence, degree of product differentiation and different barriers to entry

Example of oligopoly

Sports footwear → Nike and adidas hold 60%

Supermarket → Tesco, Sainsbury’s, Asda and Aldi hold 65%

what are the differnet market conduct/behaviors in an oligopoly

interdependence

imitation

collaboration

collusion

market conduct/behaviour

refers to how firms behave including the specific descisions they take such as pricing decsions or marketing policies

what is the difference between market structure and market conduct/behavior

market stucture defined by features like number of firms and barriers to entry, it is the charectaristics of a market whereas market conduct is how a firm behaves inside the market

how to calculate a 5 firm concentration ratio

add the market share of the top 5 firms

Is oligopoly statically efficient

no, not productive or allocativley efficient

Is an oligopoly dynamically efficient

yes, competition exists (non price esp) and profits are made so can innovate

why is non price competition important in oligopoly

allows firms to attract customers and maintain profitability while avoiding destructive price wars

examples of non price competition

product differentiation (unique features of enhancements eg Tesla autonomous driving)

Branding and advertising (eg coca-cola focus on happiness and tradition)

Ethical and moral appeal (eg innocent drinks - donate 10% of profits to charity)

Packaging and presentation (eg lush’s sustainable packaging)

loyalty programs (eg Tesco Clubcard or frequent flyer miles for an airline)

Evaluate non price competition in oligopoly

Pros

product differentiation → consumer choice

avoids price wars and an erosion of profits

drives innovation

cons

uncertain outcomes (eg advertising or innovation failure)

reduces contestability → high barriers caused by brand loyalty due to high advertising

Consequence of interdependence

Firms take into account the likely reactions of their rivals to any changes in price, output or forms of non price competition

collusion

a cooperative agreement between firms that restrict competition, causing market failure

oligopoly → collusive oligopoly

from a few firms competing with eachother → firms behaving as one, acting as a monopoly

why does collusion happen

maxinimising joint profits → firms can achieve monopoly like profits by eliminating competetive pressures

reduces uncenrtianty → provides stability in pricing and output descisions

avoiding price wars → avoid destructive price competition that erodes profits

difference between collusion and colaboration

collusion detriments consumer welfare wheras colaboration is to the benefit of all parties involved

tacit collusion

where firms coordinate their actions without explicitly communicating or making an agreement

example of tacit collusion

prcie leadership

overt collusion

an explicit illegal agreement among competing firms that restrict competition

examples of overt colusion

price fixing, output quotas, market division

example of cooperation

the standardisation of the USB port

tech firms worked together to create the USB standard

standardised how peripherals (headphones, keyboards ext) connected to computers

beneficial to consumers, increased compatibility, fasted adoption of new tech eg USB-C

how does the kinked demand model illustrate interdependence in oligopolies

The model is based on the assuption of interdependence as each firm recognises that it’s pricing decisions will provoke reactions from rivals

if the price is lowered bellow the knik → competitors will likely match the price cut to retain their market share → inelastic demand curve bellow the kink as price cuts only lead to small increases in quantity sold

if the price is increased above the kink → competitors will not follow as they will keep thier price lower to capture more market share → elastic demand above the kink

the entire model is based on the idea that firms decisions depend on how they expect their rivals to respond

price leadership

A pricing strategy where the dominant firm sets the prices in a market, and other firms follow suit to avoid price competition.

why does price leadership happen

This can stabilize prices in an oligopoly and reduce destructive price wars.

example of interdependence in an oligoply (supermarkets)

tesco and sainsbury’s doing the ALDI price match strategy to remain competitive in the grocery market.

why is there uncertinaty in an oligopoly

why may firms end up breaking a collusive agreement

up to 10% of anual worldwide revenue can be fined if firms are found to be breaching competion law

firms are maximising joint profits when in a collusive agreement but not individual profits → a firm my undercut the cartel price and increase the output to maximise their individual profits