Oligopolies

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Oligopoly

An oligopoly is an industry which is dominated by a few firms.

Characteristics of oligopoly

A few firms with a high concentration ratio and significant price-setting power.
Supernormal profit in the short-run and long-run.
Barriers to entry are relatively high.
Product differentiation.
Interdependence between firms. But they can often implement collusive strategies.
Oligopoly can be defined through either its conduct (collusive or competitive), or its structure.

Concentration ratios

Concentration ratios measure the power of the firms in an oligopoly.
- If there are four firms in an oligopoly that take up 76% of the market, then the four-firm concentration ratio is 76%.
The n-firm concentration ratio is a measure of market structure. It combines the market share of the top n firms as a % of the total market.
- E.g If the top 3 firms control 80% of a market, the 3-firm concentration ratio is 0.8.

Collusive oligopoly

Firms in an oligopoly are interdependent. Their pricing and product strategies depend on the behaviour of the other firms.
The prisoners' dilemma shows us that firms can receive a greater payoff by colluding.
Firms can agree to raise prices.
- Formal collusion: a spoken agreement between firms to keep prices high.
- Tacit collusion: an unspoken agreement between firms. Tacit collusion often works through price leadership. Here, it is in both firms best interest not to change prices.

Non-collusive oligopoly

In a non-collusive oligopoly, firms compete with each other on a number of factors, including price.
Non-collusive oligopolies are a common type of market structure.

Likelihood of types of oligopoly

Non-collusive oligopolies are more likely when we see:
- Low entry barriers, a high number of firms, and different marginal costs.
Collusive oligopolies are more likely when we see:
- High entry barriers, low number of firms, and similar marginal costs.

Features of an Oligopoly

The nature of the oligopoly can have an impact on the firms within it, as well as the consumers.

Price wars

Firms in an oligopoly may engage in a price war.
By fiercely cutting prices (sometimes called 'predatory pricing'), firms are trying to gain market share.
The idea is that by aggressively cutting prices, you will drive other firms out of the market because they can no longer compete.
New firms will be discouraged to enter because of the low profits being made.
Once firms have been driven out of the market, non-price competition can be used to maintain market share.

Advantages of oligopoly

Informal collusion is less likely than it may appear, as one firm tends to defect, which brings down the entire cartel.
This could lead to price wars, which are good for consumers due to the lower prices.
Collusive oligopolies can achieve dynamic efficiency through non-price competition and product development.
Competitive oligopolies also have the potential to be very efficient.

Examples of Oligopolies

Due to their size and the fact that they often spend large amount on advertising, many firms and oligopoly industries are well-known:

Coca-Cola and Pepsi

Technically, a market with two dominant sellers is called a duopoly.
However, the interdependence and behaviour of these firms would be the same with three or more sellers and so Coca-Cola and Pepsi could be considered here.
They have such strong brands that barriers to entry are very high and they also have strong price-setting power.
Coca-Cola and Pepsi are also very dependent on each other in terms of their price and promotion levels.

'Big Six' energy companies

Although this has since reduced, the 'Big Six' UK energy providers controlled virtually all of the gas and electricity markets.
They have been accused of price fixing by politicians and made such large profits that there were calls for a special, one-off tax on these.
The CMA has investigated this industry recently and it is under constant scrutiny.
There are high barriers to entry and brand loyalty, mainly due to customers not switching to cheaper suppliers when this is possible.

Mobile phone networks

There are several main mobile phone service providers in the UK, including Vodafone, EE, O2, etc.
There are high barriers to entry due to the need to have a licence to operate and these firms spend heavily on marketing and promotions to gain customers.
BT bought EE for £12.5bn after the CMA approved the deal, deciding that it would not cause there to be a substantial reduction in the level of competition.

1Introduction to Markets

2Market Failure

2.1Market Failure

2.1.1Types of Market Failure

2.1.2Externalities

2.1.3The Deadweight Welfare Loss of Externalities

2.1.4A-A* (AO3/4) - The Externalities of Education

2.1.5Public Goods

2.1.6Information Gaps

2.1.7End of Topic Test - Market Failure

2.1.8Application Questions - Market Failure

2.2Government Intervention

2.2.1Government Intervention in Markets

2.2.2Subsidies & Price Controls

2.2.3Pollution Permits & Regulation

2.2.4A-A* (AO3/4) - European Emissions Trading

2.2.5State Provision & Information Provision

2.2.6Government Failure

2.2.7End of Topic Test - Government Intervention

2.2.8A-A* (AO3/4) - Government Intervention

3The UK Macroeconomy

3.1Measures of Economic Performance

3.1.1Measuring Economic Growth

3.1.2National Income Data

3.1.3Inflation

3.1.4Causes of Inflation

3.1.5Consequences of Inflation

3.1.6Employment & Unemployment

3.1.7Causes & Impact of Unemployment

3.1.8A-A* (AO3/4) - Hysteresis

3.1.9Balance of Payments

3.1.10Current Account Deficit & Imbalances

3.1.11End of Topic Test - Economic Performance

3.1.12Application Questions Macroeconomy

3.2Aggregate Demand

3.2.1Aggregate Demand

3.2.2Consumption

3.2.3Investment

3.2.4Government Expenditure

3.2.5Net Trade

3.2.6End of Topic Test - Aggregated Demand

3.2.7Application Questions - AD

3.3Aggregate Supply

3.3.1Aggregate Supply

3.3.2End of Topic Test - Aggregated Supply

3.3.3A-A* (AO3/4) -Aggregate Supply

3.4National Income

3.4.1National Income

3.4.2Injections & Withdrawals

3.4.3Equilibrium Level of Real National Output

3.4.4Multiplier Effect

3.4.5End of Topic Test - National Income

3.4.6Application Questions - National Income

3.5Economic Growth

3.5.1Causes of Economic Growth

3.5.2Output Gaps

3.5.3Business Cycle

3.5.4Impact of Economic Growth

3.5.5End of Topic Test - Economic Growth

3.5.6A-A* (AO3/4) - Growth

4The UK Economy - Policies

4.1Macroeconomic Objectives & Policies

4.1.1Possible Objectives

4.1.2Demand-Side Policies - Monetary

4.1.3Demand-Side Policies - Monetary 2

4.1.4A-A* (AO3/4) - The Future of Interest Rates

4.1.5Demand-Side Policies - Fiscal

4.1.6Demand-Side Policies in 2007-08

4.1.7Strengths & Weaknesses of Demand Side

4.1.8Supply-Side Policies

4.1.9Supply-Side Policies 2

4.1.10Conflicts Between Objectives

4.1.11A-A* (AO3/4) - Conflicting Incentives

4.1.12Phillips Curve

4.1.13End of Topic Topic - Policies & Objectives

4.1.14Application Questions - UK Policies

5Business Behaviour

5.1Business Growth

5.1.1Size & Types of Firms

5.1.2Business Growth

5.1.3Pros & Cons of External Expansion

5.1.4Demergers

5.1.5End of Topic Test - Business Growth

5.1.6A-A* (AO3/4) - Business Growth

5.2Business Objectives

5.2.1Business Objectives

5.2.2End of Topic Test - Business Objectives

5.2.3Application Questions - Business Objectives

5.3Revenues, Costs & Profits

5.3.1Revenue

5.3.2Costs

5.3.3Economies & Diseconomies of Scale

5.3.4Profits

5.3.5Profits 2

5.3.6End of Topic Test - Revenue, Costs & Profits

5.3.7A-A* (AO3/4) - Revenue, Costs & Profit

6Market Structures

6.1Market Structures

6.1.1Efficiency

6.1.2Perfect Competition

6.1.3Perfect Competition 2

6.1.4Monopolistic Competition

6.1.5Oligopolies

6.1.6The Prisoner's Dilemma

6.1.7Collusion in Oligopolistic Markets

6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?

6.1.9Monopolies

6.1.10Price Discrimination

6.1.11Monopsony

6.1.12A-A* (AO3/4) - Models in Economics

6.1.13Contestability

6.1.14Benefits of Contestability

6.1.15End of Topic Test - Market Structures

6.1.16Application Questions - Market Structures

6.1.17A-A* (AO3/4) - Cereal Collusion

6.2Labour Market

6.2.1Demand for Labour

6.2.2Supply of Labour

6.2.3Labour Market Imperfections

6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment

6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?

6.2.6Wage Determination

6.2.7Elasticity of Labour Supply & Demand

6.2.8Intervention in Setting Wages

6.2.9End of Topic Test - Labour Market

6.2.10A-A* (AO3/4) - Labour Markets

6.3Government Intervention

6.3.1Reasons for Government Intervention

6.3.2Government Promotion of Competition

6.3.3Usefulness of Competition Policy & Examples

6.3.4A-A* (AO3/4) - Modern Competition Policy

6.3.5Privatisation

6.3.6Government Regulation

6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation

6.3.8Government Protection of Suppliers and Employees

6.3.9Impact of Government Intervention

6.3.10End of Topic Test - Government Intervention

6.3.11Application Questions - Government Intervention

7A Global Perspective

8Finance & Inequality

8.1Poverty & Inequality

8.1.1Absolute & Relative Poverty

8.1.2Inequality

8.1.3Inequality 2

8.1.4Lorenz Curve

8.1.5Government Policy on Poverty

8.1.6End of Topic Test - Poverty & Inequality

8.1.7A-A* (AO3/4) - Inequality & Poverty

8.2Emerging & Developing Economies

8.2.1Measures of Development

8.2.2Factors Influencing Growth & Development

8.2.3Barriers to Development

8.2.4Barriers to Development 2

8.2.5A-A* (AO3/4) - The Bottom Billion

8.2.6Development Strategies

8.2.7Interventionist Strategies

8.2.8Aid

8.2.9International Institutions

8.2.10International Institutions 2

8.2.11End of Topic Test - Emerging & Developing

8.2.12Application Questions - Developing Countries

8.3The Financial Sector

8.3.1Role of Financial Markets

8.3.2Market Failure in the Financial Sector

8.3.3Role of Central Banks

8.3.4End of Topic Test - The Financial Sector

8.3.5A-A* (AO3/4) - Financial Sector

8.4Role of the State in the Macroeconomy

8.4.1Public Expenditure

8.4.2Taxation

8.4.3Public Sector Finances

8.4.4End of Topic Test - Role of the State

8.4.5Application Questions - Role of the State

9Examples of Global Policy

9.1International Policies

9.1.1Global Debt & Deficit Policies

9.1.2Poverty & Inequality Policies

9.1.3Changes in Interest Rates

9.1.4Competitiveness Policies

9.1.5End of Topic Test - International Policies

9.1.6A-A* (AO3/4) - International Policies

9.2Policy Responses to Shocks

9.2.1International Tax Policies

9.2.2Problems for Policymakers

9.2.3End of Topic Test - Policy Responses

9.2.4Application Questions - Policy Responses

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