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Oligopoly

A summary of the key characteristics of oligopoly
by

Economics Online

on 28 October 2013

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Transcript of Oligopoly

EXAMPLES
Characteristics
Oligopoly
Major barriers to entry
Competition by a few
large firms

Entry is difficult
Types of economy of scale
Firm may set price
But these are
quickly eroded
Normal profits in the
long run
Normal profit in
long run
Super-normal profits
in the short run
Firms are interdependent
Evaluation
Allocatively and
productively
INEFFICIENT
Measured by concentration ratios
Firms are unlikely to collude
No need for government
www.EconomicsOnline.co.uk
Allocative efficiency
Where P = MC
Productive efficiency
Where MC = ATC
Start-up costs
Imperfect knowledge
Heavy advertising
Brand loyalty
Buying in bulk
Technical economies
Financial economies
Managerial economies
Risk-bearing
As new firms enter
and demand (AR) shifts to left!
However
Unnecessary differentiation
Creates waste
Excess capacity
Firms never work at full capacity
Or follow the price of others
Petrol retailing
Economies of scale
3 firm, 4 firm or 5 firm
Combined market share
Total market size
Price leadership
Supermarkets
Banks
Airlines
BP
Texaco
Shell
ESSO
Tesco
Asda
Sainsbury
Lloyds Group
HBOS
HSBC
Barclays
Firms may compete or collude
They do not like to compete on price
Demand is elastic
for a price rise
Demand is inelastic for a price reduction
Rivals do not
follow suit
Rivals do
follow suit
Prices tend to stick!
Types of collusion
Overt
Covert
Tacit
Game theory
Can help explain behaviour
Firm A
Firm B
Raise
price
Raise
price
Lower
price
Lower
price
£30m
£30m
£50m
£5m
£5m
£50m
£20m
£20m
Too risky to raise price
Solution to prisoner's dilemma
is to reduce price
Or collude and
raise price together
This is Nash Equilibrium
Full transcript