Oligopoly. An oligopoly occurs when there are a few large dominant firms, large firms are interdependent and there are significant entry/exit barriers.
Examples of oligopolies include banking, supermarkets, car manufacturers and OPEC.
Oligopoly. An oligopoly occurs when there are a few large dominant firms, large firms are interdependent and there are significant entry/exit barriers.
Examples of oligopolies include banking, supermarkets, car manufacturers and OPEC.
⦁ A few large firms dominate the market. Many small firms may also exist but with no market power.
⦁ Large firms are interdependent, their actions affect each other.
⦁ There are significant entry barriers.
Large firms face a kinked demand curve because of interdependence. Assume firms produce close substitutes. If a firm raises its price, it loses a lot of sales to rivals who do not raise their prices, so demand is elastic above P*. If a firm lowers its price, it only gains a few sales as its rivals also lower their prices to keep their market share, so demand is inelastic below P*.
A firm maximizes profit at Q* and charges a price P*. Because of the kinked demand curve, marginal revenue is discontinuous, if costs rise or fall slightly price will not change so prices are rigid.
Because prices are rigid firms must engage in non-price competition. For example:
⦁ Branding: Brand image/loyalty makes demand more inelastic and attracts new consumers as the good seems unique.
⦁ Advertising: Create a brand image and inform consumers of the benefits of the firm’s good.
⦁ Innovation: A firm could invest in Research and Development (R&D) to develop new and better products for consumers and gain a competitive advantage over rivals.
⦁ Quality: Better quality than rival goods.
⦁ Loyalty Cards: Incentivizes consumers to keep shopping with a specific firm to gain rewards.
⦁ Longer Opening Hours: Convenience for consumers.
⦁ In-Store Services: Crèche, Post-Office, chemist etc. makes it convenient for consumers.
⦁ Banking and Financial Services: Convenience for consumers as everything is in one place.
⦁ Internet Shopping: Allows consumers to shop at home.
⦁ After-Sales Services: Incentivizes consumers to return to that firm.