Oligopoly 3.4.4

What are key characteristics of an oligopoly?

• Few dominant firms

• Interdependence: firms closely monitor and react to each other’s actions.

• Barriers to entry

• Non-price competition

What kind of market concentration does an oligopoly have?

High level of market concentration

When does an oligopoly exist?

When the top 5 firms in the market account for more than 60% market shares.

What is market share?

The proportion of total revenue in a market accounted for by a brand, product or company.

What does the concentration ratio measure?

It measures the combined market share of the top ‘n’ number of firms in the industry.

What are the two most common values of ‘n’?

• 5

• 3

What are barriers to entry in an oligopoly?

• economies of scale (cost asymmetry)

• vertical integration

• brand loyalty

• control of important platforms

• expertise, goodwill and reputation

• patent protection

What is meant by interdependent behaviour?

Refers to the fact that the decisions of one firm impact on the decisions of other firms in the market.

What is the effect of interdependent behaviour on the market?

Creates a competitive environment which makes the market less predictable and volatile.

What is meant by non-price competition?

Refers to the use of other competitive strategies to gain an advantage over rivals.

What type of strategies are used in non-price competition?

• advertising/ branding

• product innovation

• product differentiation

• improving customer service

• quality of service, including after-sales

• free upgrades to products

• exclusivity/ loyalty schemes

Why might non-price strategies become more important in oligopolies?

Price competition may not be as effective due to small number of firms and the interdependence between them, making non-price strategies more important.

What are some types of product branding?

• product brand

• service brand

• umbrella brand

• corporate brand

• own-label brand

• global brand

What is a product brand?

brands associated with specific products.

What is a service brand?

add perceived value to services.

What is an umbrella brand?

assigned to more than one product

What is a corporate brand?

promoting the brand name of a business

What is an own-label brand?

type of corporate branding where retail outlets assign branding to a range of goods and services.

What is a global brand?

the ultimate brand- ‘household’ names based on familiarity, availability and stability that are effective across global markets.

When does collusion take place?

When rival companies in an industry cooperate for their own mutual benefit.

What type of collusion is a common business behaviour in an oligopoly and duopoly?

price-fixing

Why is collusion illegal in some countries?

It is a type of anti-competitive behavour.

How does collusion reduce competition in the market?

They set higher prices and limit output.

What is the differences between collusion and cooperation?

• Collusion is an illegal activity in which firms work together to manipulate the market.

• Cooperation is legal and refers to firms working together to achieve mutual benefits in a way that does not harm consumers or the market.

What is tacit collusion?

Type of collusion that occurs when firms don’t explicitly agree to collude, but instead they act in ways that suggest they are colluding.

What is one example of tacit collusion?

Price leadership- when one firm takes the lead in setting prices, and the other firms follow suit.

What are 4 aims of price fixing?

• Main aim to increase profits for all firms involved.

• Ensure they don’t compete on price- more stable and predictable market.

• Keep new entrants out of the market- low prices can be difficult to match.

• Joint profit maximisation.

What are some advantages of Oligopoly's?

• lead to price wars- increase consumer surplus.

• battle for market share leads to higher research and development- improve dynamic efficiency.

• dominant firms can exploit internal economies of scale- leads to lower average costs and lower prices in the long run.

• high supernormal profits can be taxed- source of revenue to help fund key public services.

What are some arguments against oligopoly?

• Cartel behaviour leads to higher prices, causing a loss of allocative efficiency and hurting low income households.

• High concentration ratio limits consumer choice and barriers to entry may deter innovative smaller firms from profitable entry.

• Persuasive advertising can manipulate preferences and distort the allocation of the price mechanism.

• Many transnational oligopolies avoid paying tax through shadow or transfer pricing leaving a government with less money to spend.

What is game theory?

A branch of mathematics that studies strategic decision making.