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References

Skills

Barometric Price Leadership is the same except lead by a small firm which is very responsive to changes in consumer demand patterns

Price Leadership Model

In this oligopoly market structure there is one dominant firm in the industry which, due to its size, sets the price within the industry and all other smaller firms follow suit.

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Sales Territories

Limit/Predatory Pricing

Firms agree to divide up the market and not compete in each others' territories

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Types of Collusion

Existing large firms who benefit from economies of scale agree to lower their prices forcing new entrants out of business or forcefully taking them over.

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PLATFORMS

Collusion means rival firms working together to restrict prices/quantities. These sorts of activities are usually illegal and tend to last for only short periods of time due to trust issues.

Implicit Collusion

Owners vs managers

(Principal/agent problem)

Market Structure Number 4

Output Policy

Without direct communication the firms decide to not compete in terms of price at the risk of a price war. Instead they engage in non-price competition

Satisfactory Profit Levels (Work vs Leisure)

Firms agree to only produce a certain amount of output in the industry.

Limit/predatory pricing

Aims other than Profit Max

Avoiding Government Intervention

e.g. Windfall tax

Sales Maximisation

Oligopoly

Profit

Disadvantages:

Oligopoly

SNPs indicate exploited consumers

Higher Prices due to collusion

Baumol's Sales Max Model

Check A2 book

Catch 22

Advantages:

Cartels/Collusion occurs

Stable Prices

Restricted Choice (High conc. ratio)

Aims other than Profit max

Barriers to entry exist

Product Differentiation (Improved Quality)

Benefits of Advertising

Economies of Scale (Passed on)

More Secure Employment

Quantity

Success Criteria:

Work Experience

Experience

I can:

  • State and Explain the assumptions
  • Draw and explain the shape of The Kinked Demand Curve
  • Explain Price Rigidity and Price Constancy
  • Explain the relationship between the D and MR curves
  • Draw and explain the LR Equilibrium
  • Explain Collusion and examples of its types

Oligopoly Long Run Equilibrium

Price

Assumptions:

MC

Criticism of this model......

Where did price come from????

P

----------------------------

ATC

Supernormal profits are earned due to barriers to entry. AR>ATC

Price charged is P1 at this price Quantity Q1 is produced.

Equililbrium occurs at point E where MC=MR and MC cuts MR from below.

Costs are at E and can rise between X and Y without increasing the firms price.

Scarce resources are used efficiently as the firm is producing at the minimum point of ATC

The Kinked Demand Curve

X

----------------------------

This isn't where I parked my car

E

Y

.

Origin of Kinked Demand Curve

D=AR

Price

A

Q

Quantity

The Demand curve in oligopoly is made up of 2 distinct demand curves which cross where price is set.

The upper section (A-B) is the elastic section. If the firm decides to increase its price in this section none of its competitors will follow suit and thus there will be a large decrease in demand.

The lower section (B-D) is the inelastic section. If the firm decides to lower its price in this section all of its competitors will follow suit, this is known as a price war.

If the firm decides to make either of these decisions it won't increase its revenue, thus its best course of action is to do nothing.

This leads to price 'rigidity' in Oligopoly {A.K.A. Sticky Prices}

B

---------------

Price

MR

  • Describe price leadership
  • Explain aims other than profit maximisation which firms may have

A price war is a period of fierce competition between rival firms. In which they undercut each others prices. It decreases both firm's revenue, thus they would prefer non-price competition.

The kinked demand curve is really 2 intersecting Demand curves. An inelastic one and an elastic one.

We only consider the relevant sections of each.

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P

---------------

DE

----------------------------

DI

D

Quantity

Q

  • Few Sellers: There are a few dominant firms in the industry who can influence price. There is a high concentration ratio between these firms e.g. the top 3 firms may control 70% of the market i.e. the concentration ratio is 3:70
  • Firms are Interdependent: Firms do not act independently instead they engage in reactive behaviour. This means that firms will consider the likely response of their competitors before making decisions regarding their pricing strategy
  • Product Differentiation Occurs: Firms produce close substitutes and so will engage in advertising to persuade consumers to purchase their good and not their competitors
  • Barriers to Entry Exist: There are high barriers to entry as firms try to protect their share of the market. Examples include; Economies of scale of large firms, Access to expensive technology, High set-up cost and Brand Proliferation.
  • Collusion May Occur: Firms within the industry may meet to control either prices or output in the industry, this is known as a cartel. Collusion is illegal in most countries as it exploits consumers.
  • Non-Price Competition Is More Common Than Price Competition: If firms alter their prices there is likely to be a reaction from competitor firms which could lead to a 'Price-war'. Firms try to avoid this through engaging in Non-Price Competition e.g free gifts, coupons, late-opening hours and persuasive, competitive and informative advertising

Remember if each additional unit is sold for a lower price then Marginal Revenue is decreasing.

And if the marginal is lower than the average then the average is falling

The Discontinuous Marginal Revenue

Price

e.g. OPEC

Every downward sloping D=AR curve has a corresponding downward sloping MR curve beneath it.

As our D=AR curve is made up of 2 distinct sections there will be 2 distinct sections of the MR curve too.

Unusually however our MR curve has a discontinuous section: Point X to Point Y.

We already know that the price and quantity are fixed at the kink in the D curve. We also know that the firm will produce where MC=MR.

This means that the MC curve cuts the MR curve somewhere in the discontinuous section.

If MC changes within this region the firm doesn't change its price. If MC falls the firm makes additional profit, if MC rises the firm absorbs the additional cost. Prices remain constant unless there is a large change in cost forcing the MC curve out of this region i.e there is price constancy

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P

X

----------------------------

The firm doesn't automatically increase/decrease its price every time there is an increase/decrease in costs as this would create other costs e.g. constantly changing the price lists on menus/advertising materials.

}

Y

D=AR

Quantity

Q

MR

Imperfect Competition Vs Perfect Competition Vs Monopoly Vs Oligopoly

Spectrum of Markets

  • Kinked demand curve. A to B = Elastic. B to D = inelastic
  • Price rigidity and non-price competition occur
  • Productively Efficient: Produces at min ATC in LR
  • Earns Super Normal profit in the Long Run
  • Downward sloping Demand curve (Must decrease P to increase Q)
  • Productively Inefficient: Doesn't produce at Min ATC
  • Allocatively Inefficient: Doesn't produce where P = MC (could produce more than it does)
  • Earns Normal Profit in the Long Run
  • Horizontal Demand curve. Can't influence market price.
  • Productively Efficient: Produces at min ATC in LR
  • Allocatively Efficient: Produces where P = MC
  • Earns Normal profit in the Long Run
  • Downward sloping Demand curve (Must decrease P to increase Q)
  • Productively Inefficient: Doesn't produce at Min ATC
  • Allocatively Inefficient: Doesn't produce where P = MC (could produce more than it does)
  • Earns Super Normal Profit in the Short and Long Run

Barriers increase and competition decreases

Price

Perfect Competition Imperfect Competition Oligopoly Monopoly

Concentration decreases

Quantity

Interests

Education

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