Question; Discuss the possible pricing and non-pricing strategies that a large firm in an oligopoly could use to compete with its rivals.
An oligopolist faces the kinked demand curve and, depending where it is on the curve, it could lower its prices to compete. If the firm is on the elastic part of its kinked demand curve, then it can lower its prices and increase its market share because its rivals will not react by lowering their prices. However, if the firm is on the inelastic part of its kinked demand curve and it lowers its prices, its rivals will react by lowering their prices and, ultimately, all firms will be worse off because they charge lower prices but do not sell any extra output
Another pricing strategy that large oligopolists can use to compete is collusion. If large firms in an oligopoly collude, then they can come together and form a cartel to act as a monopoly, raise prices and raise profits. But, collusion is illegal. In the UK, for instance, under the 2002 Enterprise Act, any firm caught colluding may be fined by the OFT and individuals involved could be jailed for up to 5 years and face an unlimited fine.
Alternatively, large oligopolists could use limit pricing to compete with its rivals. A large firm may use limit pricing and price so low that it makes a profit but rivals make a loss because the market price is below their rivals’ AC. The firms’ rivals will therefore be forced out of business. Although, limit pricing may not be a credible threat. Rival firms may not believe the large firm will continue this strategy for long as the large firm earns less profits.
One possible non-pricing strategy that the oligopolist could use is advertising. A large firm could advertise to make its brand more recognisable and stronger to steal rivals’ consumers. On the other hand, advertising is costly and it may be difficult to make a brand stronger or compete with other brands. Also, the firm’s large rivals may also be able to advertise just as effectively.
Another non-pricing strategy that an oligopolist may use is to focus on customer care. A large firm could attempt to offer better customer care than rivals, maybe the firm could give a more personal or more efficient service than rivals. However, maybe only a small firm could offer such personal services and customer care, a firm may not want to remain small.