Oligopoly

A market situation where there are small no. of large firms in the industry, and where firms are interdependent and collude with each other
Characteristics of an Oligopolistic Market
1. Few Sellers in the Industry: they tend to be price setters rather than price takers
2. Interdependence between Firms: they will take into account the likely reactions of their competitors
3. Product Differentiation Occurs: the goods that firms sell are close substitutes
4. Barriers to Entry are high
  1. High set-up costs
  2. Access to expensive technology
  3. Brand proliferation
5. Collusion May Occur
6. Non-price Competition Is More Common than Price Competition
  1. Persuasive advertising
  2. Competitive Advertising
  3. Informative Advertising
The Kinked Demand Curve
1. Paul Sweezy
2. A firm's competitors would not follow a price increase but would instead increase their market share by selling more at existing prices and thereby gaining extra profit. If price was reduced then all firms would similarly reduce their prices
3. Price Rigidity: a situation where firms are unwilling to enter into price competition
4. Long Run: SPECS
  1. The firm is earning SNP because AR>AC
  2. Price charged at P and quantity produced at Q
  3. Equilibrium occurs at MC=MR
  4. Scarce resources used efficiently as firm is producing at lowest point of AC
  5. If costs rise, then market price tends to remain constant
Collusion in Oligopolistic Markets
1. Any action undertaken by separate and rival firms to restrict competition between them with a view to increasing their total profit
2. Types of Collusion
  1. Output Policy: firms could join together to limit output to certain agreed amounts
  2. Sales Territories: firms could divide up the markets between them and agree not to compete in each other's market segments
  3. Limit Pricing: existing companies may not wish to encourage new entrants by earning SNP. Instead they lower their prices so low it is unattractive to set up
    1. That existing company sacrifices larger profits for long-term survival
Pursuing Objectives Other than Profit Maximisation
1. Government Intervention: may decide against earning huge SNP for fear the government will restrict their acctivities
2. Limit Pricing
3. Managers Not Owners
4. Managers May Pursue Increased Sales
5. Satisfactory Profit Levels: owners may want more leisure time

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Oligopoly

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