Oligopoly
Concept
 Oligopoly
 Price rigidity
 Non-p
competition
Knowledge descriptor
1. Def olig, BTE,
assumptions
2. Explain relevance of
assumpts of olig
3. Explain cartels
1. Explain price
rigidity in noncollusive olig
1. Evaluate non-P
competition
2. Efficiency…
3. Competition…
4. R and D…
5. Choice…
6. Innovation…EoS…
Questions for review
1. What is the 4FCR and how is it applied here?
2. Why can olig’s have LR abnormal profit?
3. Why is there an incentive for cartels to form?
4. Why do cartels so seldom work in the LR?
1. Use the kinked D-curve to explain P rigidity and
non-P competition
1. Explain why oligopolies often resort to nonprice competition. (Use examples!)
2. Note: ads and marketing helps create BTE!
3. Evaluate oligopolies in terms of
stakeholders…
4. …consumers…firms…efficiency…
5. Advantages and disadvantages
What is an oligopoly?
An oligopoly is a market that is dominated by a few large firms, meaning that they produce a
large percentage of the output. The remaining percentage however is produced by smaller
firms. Smaller firms can often survive alongside the larger firms because they supply a market
niche. (A very small part of the market that is not served by the dominant firms)
Features of an oligopoly

Interdependence – where one action of a large firm may directly affect
others.
In oligopolies, each firm is so large that its actions may affect market
conditions. For example, if a large firm was to decrease their price of a good,
the firm has to also take into account the probability of a competing firm also
lowering their prices which would result a price war.

Barriers to entry
Large firms are likely to benefit from barriers to entry – For example the set
up cost are very high if a firm were to start an airline company.
Large firms may also discourage other entries by investing heavily in their
brand.
Legal barriers. Access to supply-chains. Access to raw materials.
High barriers to entry can lead to long run profits as it prevents other firms
from entering the market and taking some excess profit from the larger firms,
therefore reducing their dominance.

Price Rigidity
This is when prices stay the same for a long time, the price is set by the few
large firms and others just follow. This is because they want to avoid price war.
A price war is when a large firm cuts the price of a good, then the other few
large firms have to the same otherwise they will lose sales. This results a
lower revenue and profit for all firms.
- See ‘kinked demand curve’ (NPOS!)

Non-price competition
This is where a firm uses techniques such as advertising and promotions such
as coupons to avoid price wars. Branding is a feature in markets to help
consumers differentiate them from other firms in the same market. Product
differentiation is also a common technique used to lure the consumers into
buying their product; this is where firms try to differentiate their product from
other firms (e.g. different texture, color size shape). They can also change the
level of service, they charge a higher price because they provide better service,
and they also add value to their product (e.g. airplanes – first, business, and
economy class).

Economies of scale
Mainly the dominant firms will benefit because they are bigger. So as their
output increases their average cost falls, profit will also increase. Bigger is
better because they can use predatory pricing which means that large firms can
set the breakeven price. This allows larger firms to deflect potential entrance.

Collusion – where dominant firms set up agreements to restrict
competition.
For example, large firms can agree to share the market geographically, this is
where the larger firms can only supply and produce in certain areas/countries.
Another method is price fixing; this is where the companies all agree to charge
the same price for the products. Firms may also agree to restrict output; this
decreases supply which drives the price up.
Advantages of oligopoly

Economies of scale
Larger firms in the market can often exploit economies of scale (e.g. Bulkbuying, financial, technical benefits). This means that their average costs will
be lower therefore may lead to the firm lowering the price for consumers.

Price stability
Although prices stay stable for long periods of time, price wars can occur.
Consumers can benefit from prices because prices are lowered, however price
wars do not last long. After one of the firms is out of the market there will be
less competition and in the long term, prices will be pushed higher by the
survivors.

Choice
Competition in oligopolistic markets ensures that consumers have some choice;
this is because when firms advertise their products, they often want to
differentiate their product somehow to make it unique. This provides
consumers different choices and if a firm creates a new product, more choices
will be available.
Disadvantages of oligopoly

Cartels
This is where a group of firms formally join together and agree on setting the
price or output level; this enables them to act as a monopoly.

Collusion
If firms agree to collude, consumers will end up paying higher prices;
consumers may also suffer if the market is shared geographically because each
area will only be supplied by one firm.