Oligopoly
By the end of this section you should be able to:
- Describe, using examples, the assumed characteristics of an oligopoly: the dominance of the industry by a small number of firms; the importance of interdependence; differentiated or homogeneous products; high barriers to entry.
- Explain why interdependence is responsible for the dilemma faced by oligopolistic firms - whether to compete or to collude.
- Explain how a concentration ratio may be used to identify an oligopoly.
- Explain how game theory (the simple prisoner's dilemma) can illustrate strategic interdependence and the options available to oligopolies.
- Explain the term "collusion", give examples, and state that it is usually (in most countries) illegal.
- Explain the term "cartel".
- Explain that the primary goal of a cartel is to limit competition between member firms and to maximize joint profits as if the firms were collectively a monopoly.
- Explain the incentive of cartel members to cheat.
- Analyse the conditions that make cartel structures difficult to maintain.
- Describe the term "tacit collusion", including reference to price leadership by a dominant firm.
- Explain that the behaviour of firms in a non-collusive oligopoly is strategic in order to take account of possible actions by rivals.
- Explain, using a diagram, the existence of price rigidities, with reference to the kinked demand curve.
- Explain why non-price competition is common in oligopolistic markets, with reference to the risk of price wars.
- Describe, using examples, types of non-price competition.
- Describe price discrimination as the practice of charging different prices to different consumer groups for the same product, where the price difference is not justified by differences in cost.
- Explain that price discrimination may only take place if all of the following conditions exist: the firm must possess some degree of market power; there must be groups of consumers with differing price elasticities of demand for the product; the firm must be able to separate groups to ensure that no resale of the product occurs.
- Draw a diagram to illustrate how a firm maximizes profit in third degree price discrimination, explaining why the higher price is set in the market with the relatively more inelastic demand.
