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Oligopoly • A few large interdependent firms dominate an industry • High concentration ratios (eg. 5-firm conc. Ratio = 80%) • Collusion can occur (bad for consumers) Types of Collusion • Cartel: firms make formal agreements to fix price and/or output (eg. OPEC) – illegal in the UK • Secret collusion: firms agree secretly to fix price and/or output to gain mutual benefit – illegal in the UK • Tacit collusion: firms act as if they have made an agreement but have not discusses this fact – “price leadership” means firms tend to following the pricing decisions of the dominant firm in the group Oligopoly – the kinked demand curve Price Elastic: if the firm raises price, consumers will switch to competitors – large ↓ Qd → ↓ Revenue P profit max Inelastic: if the firm lowers price, other firms will do the same – very small ↑ Qd → ↓ Revenue Demand Q profit max Quantity So, profit maximising price is where the demand curve kinks. Oligopoly – the curves (2)! Price MC2 MC1 P profit max MC MR Q profit max Demand = AR Quantity Due to the fact that there is one price which is so much better than others, there will be a range of MC curves for which this price will be the profit maximising output. Only if MC rises or falls significantly (outside this range) will the best price change. Non-Price Competition • Due to the fact that firms cannot manipulate their price to increase market share, price wars can be very detrimental • oligopoly firms tend to engage in non-price competition • Eg. promotions, give-aways, service, packaging, loyalty points etc.
