A2 microeconomics - basics of oligopoly

1. A2 Micro
Oligopoly (Essentials)
Tutor2u, Summer 2013

2. What is an Oligopoly?
High concentration ratio > 60% for top 5
firms, branded products
Entry barriers – long run supernormal profits
Inter-dependent decisions / uncertainty
This is the key
point about
oligopoly!

3. What is an Oligopoly?
High concentration ratio > 60% for top 5
firms, branded products
Entry barriers – long run supernormal profits
Inter-dependent decisions / uncertainty
This is the key
point about
oligopoly!

4. What is an Oligopoly?
High concentration ratio > 60% for top 5
firms, branded products
Entry barriers – long run supernormal profits
Inter-dependent decisions / uncertainty
This is the key
point about
oligopoly!

5. Strategic Interdependence
• One firm’s output and price decisions are
influenced by its competitors
• Because there are few sellers, each oligopolist
is likely to be aware of the actions of the
others. Decisions of one firm influence, and
are influenced by, the decisions of other firms
• This causes oligopolistic industries to be a high
risk for collusion

6. Business Behaviour
Price
Wars
Price
Matching
Non-Price
Competition
Cartels
Co-
operation

7. Oligopoly Essentials
OLIGOPOLY
Price
makers
“Few”
number of
dominant
sellers
Long run
supernormal
profits
Strategic
interdependence

8. Oligopoly (O), duopoly (D) or a highly
competitive (C) market – you decide!
Household detergent
suppliers in the UK
UK High Street Banks
Plumbers & decorators in
Manchester
D
O
C

9. Oligopoly (O), duopoly (D) or a highly
competitive (C) market – you decide!
Producers of liquefied gas
(worldwide)
Aircraft manufacturing
Retail pharmacies / chemists
Parcel deliveries in London
O
D
O
C

10. Pharmacies in Bristol
Pharmacies in
central
Birmingham

11. Crucial aspects of oligopolyKey
Evaluation
1. Oligopoly is best defined by
the actual behaviour of
businesses
2. High market concentration
does not necessarily mean
an absence of competition
3. Non-price competition is
given strong emphasis
There are several
oligopoly models at
A2 – a highly
common area for
examiners to test!

12. Cost & Price
Output (Q)
The Kinked Demand Curve Model
MR AR
MC
P1
Q1
Importance of Non-Price
Competition in Oligopoly
1. Price stickiness
observed in oligopoly
2. Price may remain close
to P1

13. Cost & Price
Output (Q)
The Kinked Demand Curve Model
MR AR
MC
P1
Q1
Kinked Demand Curve
1. An oligopolist faces a downward
sloping demand curve but the
elasticity may depend on the
reaction of rivals to changes in price
and output
2. (a) rivals will not follow a price
increase by one firm, so the acting
firm will lose market share -
therefore demand will be relatively
elastic and a rise in price
3. (b) rivals are more likely to match a
price fall by one firm to avoid a loss
of market share. If this happens
demand will be more inelastic and a
fall in price will also lead to a fall in
total revenue
MC2

14. Cost & Price
Output (Q)
The Kinked Demand Curve Model
MR AR
MC
P1
Q1
Importance of Non-Price
Competition in Oligopoly
1. Price stickiness
observed in oligopoly
2. Price may remain close
to P1
3. Even if MC increases
MC2

15. Non-Price Competition is key to market share and profitability
Innovation Quality of service Free Upgrades
Exclusivity

16. Non-Price Competition is key to market share and profitability
Innovation Quality of service Free Upgrades
Exclusivity

17. Non-Price Competition is key to market share and profitability
Innovation Quality of service Free Upgrades
Exclusivity

18. Non-Price Competition is key to market share and profitability
Innovation Quality of service Free Upgrades
Exclusivity

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