Oligopoly

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Oligopoly
Powerpoint produced by Rachel Farrell (PDST)
Aoife Healion (SHS, Tullamore) Sources of
information SEC Marking Scheme
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Syllabus
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Exam Questions (HL)

• Short

• Long

• 2010 Q 4
• 2004 Q 4
• 2002 Q 5

• 2011 Q 2
• 2006 Q 2
• 2003 Q 1
• 1999 Q 2

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Oligopoly

• Is a market form in which a market or industry is
  dominated by a small number of sellers who likely
  to be aware of the actions of the others and can
  influence price or quantity sold.
• Proctor Gamble, Unilever, Tesco..

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Car manufacturers
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Examples

• Petrol/Oil Topaz, Esso..
• Motor Ford, Toyota, Nissan
• Retail Banks AIB, BOI
• Supermarkets Tesco, Dunnes
• Detergent Manuf P G. Unilever

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Assumptions of oligopolies

• 1. Few large firms
• There are a few large firms that dominate the
  industry.
• They can influence the price or quantity
  produced.

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• 2. Firms interact with each other
• Firms in oligopoy do not act independently of
  each other.
• They take into account the likely reactions of
  their competitors.

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• 3. Product differention
• Firms sell similar products.
• They engage in competitive advertising.
• They engage in brand marketing.
• They try to convince consumes that their product
  is better.

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• 4. Collusion

Is an agreement among firms to divide the market,
set prices, or limit production. Eg. OPEC
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5. Firms may pursue objectives other than profit
maximisation

• a) Maximise sales
• Once a certain level of profit has been earned
  the firm may concentrate on increasing their
  share of the market.
• b) Prevent government intervention
• Firms may fear that SNP would attract a
  government investigation and restrict their
  activities.

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• 6. There may be barriers to entry into the
  industry
• Firms may not be able to enter the industry
  because of
• Economies of scale
• Limit pricing
• Control over the channels of distribution
• Brand proliferation

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Barriers to Entry

• 1. Economies of Scale
• Large firms produce on a large scale and benefit
  form decreased cost per unit .
• If a new firm tries to enter the market the
  existing firm that is well established can afford
  to lower price to deter them.
• New firms will be unable to compete due to the
  huge set up costs involved.

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Limit Pricing

• Is an agreement between firms to set a relatively
  low price to make it unprofitable for new firms
  to enter the industry.

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Control over the channels of distribution

• Ologopolies may refuse to supply retailers who
  stock the products of competitors.

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Brand Proliferation

• The same firm produces several brands of the same
  type of product.
• This will leave very little room for new firms to
  competitor.

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Unilever
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Proctor Gamble
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Research!!!!

• Look at the household products in your own home
  to see what company produces them.

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Non price competition2010 SQ 4

• Is when competing firms try to increase
  sales/market share by methods other than changing
  prices.

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Examples

• Branding To create loyalty and recognition.
• Packaging Distinctive to competitors.
• Competitive advertising Creates difference in
  the minds of consumers.

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• Opening hours Extended, 24/7.
• Quality of service Layout, staff, services.
• Sponsorship Of local or national events.
• Special offers Gifts, coupons, loyalty cards.

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Benefits of non-price comp to consumers2002 SQ
5/2011 Q 2

• 1. Consumer loyalty rewarded
• Consumers can receive loyalty points which can be
  used as they wish.
• 2. Stability in prices
• Consumers will be better able to budget as prices
  will not always be changing.
• 3. Better quality commodities / services
• Firms may offer better service and/ or after
  sales service
• to consumers.
• 4. More informed consumers
• Through advertising consumers may get more
  information about products and services and so
  can make more informed choices.

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Price competition

• Is when competing firms try to increase
  sales/market share by changing price.

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Benefits of price competition to consumers

• 1. Lower prices
• Consumers will be able to get better value from
  their limited income.
• 2. More choice
• Consumers will have a greater disposable income
  and can decide what to spend it on.
• 3. Preferable to NPC because
• Special offers of NPC may be unwanted
• Vouchers may be unused.

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Shape of the demand curve of a firm in oligopoly

• If the price leader sets the price at B then all
  firms face a kinked demand curve ABC.

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Kinked Demand Curve (2011/2006/2003)
Elastic demand curve increase in price, lose
many customers
A
Price

• D AR

P1
B
Inelastic demand curve decrease in price, gain
few customers
C
Q1
Quantity
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• 1. Along the elastic demand curve above point B,
  if a firm increases price it will lose many
  customers and revenue.
• 2. Along the inelastic demand curve below pon B,
  if a firm decreases price so will competitors, so
  it will gain few customers but will lose revenue.

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Relationship between the demand curve and the
marginal revenue curve.

• Because the D/C is kinked the firms MR curve
  consists of two distinct parts.
• It is constant between D and E.
• Between these points if MC changes, price will
  not change.

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Relationship between the demand curve and the
marginal revenue curve.
A
D AR
Price
P1
B

• D

MR
E
C
Q1
Quantity
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Price rigidity/Sticky prices

• Prices tend not to change when costs change in
  oligoploy.
• Firms fear the reaction of their competitors.
• If a firm increase price their competitor will
  not, so they will lose customers revenue.
• If a firms decrease price so will competitors, so
  they will not gain customers and lose revenue.

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Constant prices

• Firms in oligopoly may not increase prices when
  costs increase as it may cost more to change
  catalogues and price lists than change the price.
• In this case the oligopolist will absorb the
  price increase themselves.

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Long run equilibrium of a firm in oligopoly
DAR
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Long run equilibrium of a firm in oligopoly

1. Eq is where MCMR MC is rising.
2. This occurs at point G on the diagram.
3. The firm will produce at Q 1
4. The firm will charge price P 1
5. Due to barriers to entry firms may earn SNP if AR
   gt AC.
6. Even if costs rise between D E prices remain
   rigid at P 1.

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• Sweezys kinked demand curve explained price
  rigidity in the 1930s.
• However in the 1970s oligopolies did increase
  prices due to oil prices.
• In the 1980s oligopolists increased prices due
  to increased demand.

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Question

• Do you believe that the Irish retail market for
  banking services operates under oligopolistic
  conditions?

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• Yes
• Few sellers.
• Interdependence between firms
• Close substitutes
• Remember headings, bullet points examples.