Download Oligopoly

Oligopoly
Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)
Sources of information: SEC Marking Scheme
Syllabus
Exam Questions (HL)
Short
• 2010 Q 4
• 2004 Q 4
• 2002 Q 5
Long
• 2011 Q 2
• 2006 Q 2
• 2003 Q 1
• 1999 Q 2
Oligopoly
• Is a market form in which a market
or industry is dominated by a small
number of sellers who likely to be
aware of the actions of the others
and can influence price or quantity
sold.
• Proctor & Gamble, Unilever, Tesco…..
Car manufacturers
Examples
•
•
•
•
•
Petrol/Oil: Topaz, Esso..
Motor: Ford, Toyota, Nissan
Retail Banks: AIB, BOI
Supermarkets: Tesco, Dunnes
Detergent Manuf: P & G. Unilever
Assumptions of
oligopolies
1. Few large firms
• There are a few large firms that
dominate the industry.
• They can influence the price or
quantity produced.
2. Firms interact with each other
• Firms in oligopoy do not act
independently of each other.
• They take into account the likely
reactions of their competitors.
3. Product differention
• Firms sell similar products.
• They engage in competitive
advertising.
• They engage in brand marketing.
• They try to convince consumes that
their product is better.
4. Collusion
Is an agreement among firms to
divide the market, set prices, or
limit production.
Eg. OPEC
5. Firms may pursue objectives other
than profit maximisation
a) Maximise sales:
• Once a certain level of profit has been
earned the firm may concentrate on
increasing their share of the market.
b) Prevent government intervention:
• Firms may fear that SNP would attract a
government investigation and restrict
their activities.
6. There may be barriers to entry into
the industry
• Firms may not be able to enter the
industry because of:
a) Economies of scale
b) Limit pricing
c) Control over the channels of
distribution
d) Brand proliferation
Barriers to Entry
1. Economies of Scale
• Large firms produce on a large scale and
benefit form decreased cost per unit .
• If a new firm tries to enter the market
the existing firm that is well established
can afford to lower price to deter them.
• New firms will be unable to compete due to
the huge set up costs involved.
•
Limit Pricing
• Is an agreement between firms to
set a relatively low price to make it
unprofitable for new firms to enter
the industry.
Control over the
channels of distribution
• Ologopolies may refuse to supply
retailers who stock the products of
competitors.
Brand Proliferation
• The same firm produces several
brands of the same type of product.
• This will leave very little room for
new firms to competitor.
Unilever
Proctor & Gamble
Research!!!!
• Look at the household products in
your own home to see what company
produces them.
Non price competition
2010 SQ 4
• Is when competing firms try to
increase sales/market share by
methods other than changing prices.
Examples
• Branding: To create loyalty and
recognition.
• Packaging: Distinctive to competitors.
• Competitive advertising: Creates
difference in the minds of consumers.
• Opening hours: Extended, 24/7.
• Quality of service: Layout, staff,
services.
• Sponsorship: Of local or national
events.
• Special offers: Gifts, coupons, loyalty
cards.
Benefits of non-price comp to consumers
2002 SQ 5/2011 Q 2
1. Consumer loyalty rewarded
• Consumers can receive loyalty points which can be used as they
wish.
2. Stability in prices
• Consumers will be better able to budget as prices will not
always be changing.
3. Better quality commodities / services
• Firms may offer better service and/ or after sales service
to consumers.
4. More informed consumers
• Through advertising consumers may get more information
about products and services and so can make more informed
choices.
Price competition
• Is when competing firms try to
increase sales/market share by
changing price.
Benefits of price competition
to consumers
1. Lower prices
• Consumers will be able to get better value
from their limited income.
2. More choice
• Consumers will have a greater disposable
income and can decide what to spend it on.
3. Preferable to NPC because;
• Special offers of NPC may be unwanted
• Vouchers may be unused.
Shape of the demand curve
of a firm in oligopoly
• If the price leader sets the price at
B then all firms face a kinked demand
curve ABC.
Kinked Demand Curve
(2011/2006/2003)
Elastic demand curve
increase in price, lose many customers
Price
P1
A
D = AR
B
Inelastic demand curve
decrease in price, gain few
customers
C
Q1
Quantity
1. Along the elastic demand curve above
point B, if a firm increases price it will
lose many customers and revenue.
2. Along the inelastic demand curve below
pon B, if a firm decreases price so will
competitors, so it will gain few customers
but will lose revenue.
Relationship between the
demand curve and the
marginal revenue curve.
• Because the D/C is kinked the firms
MR curve consists of two distinct
parts.
• It is constant between D and E.
• Between these points if MC changes,
price will not change.
Relationship between the
demand curve and the marginal revenue curve.
Price
A
P1
D = AR
B
MR
D
E
C
Q1
Quantity
Price rigidity/Sticky prices
• Prices tend not to change when costs change
in oligoploy.
• Firms fear the reaction of their
competitors.
• If a firm increase price their competitor will
not, so they will lose customers & revenue.
• If a firms decrease price so will
competitors, so they will not gain customers
and lose revenue.
Constant prices
• Firms in oligopoly may not increase
prices when costs increase as it may
cost more to change catalogues and
price lists than change the price.
• In this case the oligopolist will
absorb the price increase
themselves.
Long run equilibrium
of a firm in oligopoly
D=AR
Long run equilibrium of a
firm in oligopoly
1.
2.
3.
4.
5.
Eq is where MC=MR & MC is rising.
This occurs at point G on the diagram.
The firm will produce at Q 1
The firm will charge price P 1
Due to barriers to entry firms may
earn SNP if AR > AC.
6. Even if costs rise between D & E
prices remain rigid at P 1.
• Sweezy’s kinked demand curve
explained price rigidity in the 1930’s.
• However in the 1970’s oligopolies did
increase prices due to oil prices.
• In the 1980’s oligopolists increased
prices due to increased demand.
Question
• Do you believe that the Irish retail
market for banking services operates
under oligopolistic conditions?
• Yes
1. Few sellers……….
2. Interdependence between firms………
3. Close substitutes………………
• Remember headings, bullet points &
examples.