Oligopoly Characteristics and Types

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Questions and Answers

What are the characteristics of an oligopoly?

Few large firms, 2) Homogeneous or differentiated, 3) Control over price but mutual interdependence, 4) Entry barriers.

How many firms are in an oligopoly?

Usually 3-5.

What are the two types of goods oligopolies produce?

Industrial products

Consumer goods industries

Both A and B (correct)

None of the above

Are oligopolies price makers or price takers?

True Signup and view all the answers

What is mutual interdependence in oligopolies?

There is a strategy required due to the interdependence of oligopolies when it comes to advertising. Signup and view all the answers

What are the four barriers to entry of an oligopoly?

<ol> <li>Economies of scale & high capital requirements, 2) Ownership of raw materials, 3) Patents, 4) Preemptive pricing/ advertising strategies.</li> </ol> Signup and view all the answers

Some oligopolies develop from the growth of what?

Dominant firms. Signup and view all the answers

What is a merger?

Two or more firms merge to increase market share and achieve greater economies of scale. Signup and view all the answers

What is the concentration ratio?

It shows the percentage of total output produced and sold by an industry's largest firms. Signup and view all the answers

What is the common ratio in oligopolies?

4-firm concentration ratio. Signup and view all the answers

What does it mean if the largest four firms control 40% or more of the market?

It indicates a significant concentration of market power. Signup and view all the answers

What are the three shortcomings of concentration ratios?

<ol> <li>Localized markets, 2) Inter-industry competition, 3) Global trade.</li> </ol> Signup and view all the answers

Define localized market shortcomings of concentration ratios.

Ratios are for the entire nation; some markets for products are localized. Signup and view all the answers

What does definition of industries arbitrary mean?

It may refer to competition between products in different industries. Signup and view all the answers

What does global trade imply regarding concentration ratios?

Data used for ratios does not include important competition from foreign supplies. Signup and view all the answers

What does the oligopoly demand curve look like?

It is down sloping but location and elasticity depend on rivals' reactions to price changes. Signup and view all the answers

What is collusion?

Firms in the industry reach an agreement to fix prices, divide up the market, or otherwise restrict competition. Signup and view all the answers

What happens between the firms that collude?

Firms come to an agreement to split the market. Signup and view all the answers

What are the types of joint-profit maximization (collusion)?

All of the above Signup and view all the answers

What is overt collusion?

A group of producers with a formal written agreement to set price, control output, and divide the market. Signup and view all the answers

What is covert collusion?

Tactical understandings, such as Gentleman's Agreements. Signup and view all the answers

What is price leadership in an oligopoly?

A dominant firm initiates price changes and all firms follow. Signup and view all the answers

What are obstacles to collusion?

<ol> <li>Demand and cost differences, 2) Number of firms, 3) Cheating, 4) Recession, 5) Potential energy, 6) Legal obstacles.</li> </ol> Signup and view all the answers

How does demand affect collusion?

If one firm has a lower demand curve than others, it incurs higher costs and operates in a higher price range. Signup and view all the answers

How does the number of firms affect collusion?

The more firms there are, the harder it is for everyone to be on the same page. Signup and view all the answers

How does cheating affect collusion?

If one firm cheats, the entire credibility of the collusion goes away. Signup and view all the answers

Study Notes

Characteristics of Oligopoly

Comprises few large firms controlling a significant market share.
Produces either homogeneous or differentiated products.
Firms exhibit control over price while maintaining mutual interdependence.
High barriers to entry prevent new competitors from entering the market.

Number of Firms

Typically consists of 3 to 5 firms, though the exact number can be undefined.

Types of Goods in Oligopolies

Industrial products include standardized goods like steel, zinc, and copper.
Consumer goods may involve differentiated products such as automobiles, electronics, and cereals.

Price Dynamics

Oligopolies are price makers but must consider competitors’ responses to any price changes.

Mutual Interdependence

Firms engage in strategic advertising behavior due to their mutual dependence on each other’s actions.

Barriers to Entry

Economies of scale and high capital requirements.
Ownership stakes in essential raw materials.
Patents that protect product development.
Preemptive pricing and advertising strategies to deter entrants.

Growth from Dominant Firms

Oligopolies can develop following the expansion of dominant firms in specific markets, such as cereals or candy bars.

Mergers

Merger definition includes the unification of two or more firms to boost market share and achieve economies of scale, often aimed at enhancing monopoly power.

Concentration Ratio

Represents the percentage of total output produced by the largest firms in an industry, illustrating market concentration.

Common Concentration Ratio

The standard focus is on the four-firm concentration ratio.

Interpretation of Concentration Ratios

A concentration ratio over 40% by the largest four firms indicates significant market control.

Shortcomings of Concentration Ratios

Localized markets may not accurately represent competition.
Inter-industry competition can obscure real market dynamics.
Global trade competition is often excluded from domestic ratios.

Localized Market Limitations

Concentration ratios reflect national data, potentially ignoring localized market dynamics, such as concrete production.

Arbitrary Industry Classifications

Industries may overlap, with products from different sectors competing, such as aluminum and copper.

Global Trade Context

Ratios often fail to account for competition posed by international suppliers in a global market.

Oligopoly Demand Curve

Characterized as downward sloping, influenced by rivals' reactions to price changes.

Collusion Definition

Occurs when firms agree to fix prices, divide market shares, or limit competition to enhance profitability.

Collusion Agreements

Firms that collude often allocate market shares among themselves.

Joint-Profit Maximization Types

Includes overt collusion (cartel), covert collusion (tacit agreements), and price leadership.

Overt Collusion

Involves a formal agreement among producers to set prices, control output, and partition the market.

Covert Collusion

Based on tacit understandings, such as Gentleman's Agreements, lacking formal contracts.

Price Leadership

A strategy where the dominant firm sets price changes that other firms follow suit.

Obstacles to Collusion

Demand and cost differences across firms.
Increased number of firms complicating unity.
Risks of cheating undermining agreements.
Economic downturns affecting industry stability.
Potential new entrants challenging established firms.
Legal restrictions imposing regulations on collusion.

Demand Influence on Collusion

Unequal demand curves among firms can lead to divergent production costs, affecting price stability.

Number of Firms and Collusion

A higher number of firms makes coordinated efforts more difficult, increasing challenges in maintaining collusion.

Impact of Cheating on Collusion

Any instance of cheating erodes the credibility of the collusion, undermining its effectiveness.

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Description

This quiz focuses on the characteristics and types of oligopoly, including the number of firms involved and the types of goods produced. Test your knowledge on the key features that define oligopoly in economics and understand its implications in market structures.