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
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