Download CBEB1107 MANAGERIAL ECONOMICS 1 TUTORIAL 7 i. Why do

CBEB1107 MANAGERIAL ECONOMICS 1
TUTORIAL 7
1.
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Why do oligopoly exist?
List five oligopolist whose products you own or regularly purchase.
What distinguishes oligopoly from monopolistic competition?
Answer
i.
Oligopoly exist when there are only few large producers of a homogeneous or
differentiated product, have considerable control over their prices but each must consider
the reaction of its rivals to its own pricing, output and advertising decision or
interdependence!
ii.
Oligopoly products – ie mobile service provider, cigarettes, computers, branded jeans,
motor vehicles….
iii.
Can be differentiated through:
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Number of producer : Oligopoly - few, Monopolistic – many
Barriers to entry: Oligopoly – high, Monopolistic – none
Dependence: Oligopoly – interdependent, Monopolistic – Independence
Control over price – Oligopoly – considerable, Monopolistic – some
Why might price collusion occur in oligopolistics industries?
Asses the economic desirability of collusive pricing?
What are the main obstacles to collusion?
Answer
i.
Price collusion means the rival firms agree to establish and maintain a similar price
(normally high price) to avoid a price war.
ii.
Economic desirability of collusive pricing:
 Avoiding a price war which may lead to a significant loss
 Increase market share and profit
 Block the potential entrant into the industry
iii.
Obstacles to collusion:
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Demand & cost differences
Number of firm
Potential entry
Cheating
Recession
Legal obstacles