Oligopoly

Few large producers Homogeneous or Differentiated Products Control over price Mutual Interdependence Entry barriers – economies of scale, large

expenditure for capital

Characteristics + Explanation

Concentration ratio - % total output produced and sold by industry’s largest firm, nation as a whole

Localized Markets – high transportation costs Interindustry Competition- competition between

two products associated with different industries World Trade – import competition Herfindahl Index – measures size of firms in

relation to industry, indicates competition

Industry Concentration

Game-Theory analyzes pricing behavior, predicts outcome of industry’s strategy

Collusion – set a price level for market, generally illegal, price leadership is informal collusion & legal

Game-Theory Model + Collusion

Graphs

a. Differing demand and cost conditions among firms in the industry;

b. A large number of firms in the industry; c. The incentive to cheat; d. Recession and declining demand

(increasing ATC); e. The attraction of potential entry of new

firms if prices are too high; and f. Antitrust laws that prohibit collusion.

Obstacles of Collusion

Price leadership is a model of oligopoly, where one firm sets prices and others follow.

The kinked demand curve model of oligopoly demonstrates a firms response when one firm changes its price. The model assumes that when one firm cuts its price, the other firms will match the price cut. But if one firm raises its price, other firms don’t match the price raise.

Price Leadership Model

Positive – reduces search time and minimizes costs (gas prices, parking fees, value of your time), diminishes monopoly power

Negative – manipulates costumers, misleading + extravagant claims

Advertising

Where P > MC and ATCQualifications – increased foreign competition, limited pricing, technological advance

Efficiency