Market Structures MCQ 4 (oligopoly)

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Questions and Answers

What is a characteristic of an oligopolistic market?

Many firms producing homogeneous products

Firms do not take into account the reactions of competitors

Free entry and exit of firms

A small number of large firms dominating the market (correct)

What is the result of product differentiation in an oligopolistic market?

Goods and services become perfect substitutes

Goods and services become completely different

Goods and services become close but not perfect substitutes (correct)

Goods and services become identical

Why do firms in an oligopolistic market not engage in interdependent decision-making?

Because they take into account the likely reactions of competitors (correct)

Because they are not interested in making profits

Because they want to ignore their competitors

Because they want to collude with each other

What is a barrier to entry in an oligopolistic market?

Economies of scale Signup and view all the answers

What is a goal of firms in an oligopolistic market, aside from profit-maximisation?

To discourage others from entering the market Signup and view all the answers

What is the role of the CCPC in regulating oligopolies?

To investigate allegations of anti-competitive behaviour and breaches of the Competition Act Signup and view all the answers

What is the main reason why prices tend to remain unchanged in oligopolistic markets?

To avoid a fall in sales or provoke a price war Signup and view all the answers

What is the purpose of limit pricing in an oligopolistic market?

To discourage new firms from entering the market Signup and view all the answers

What is the legality of limit pricing?

It is illegal Signup and view all the answers

What is the term for leaving the price the same even if costs of production change?

Price rigidity Signup and view all the answers

What is the primary goal of price fixing in an oligopolistic market?

To stabilize prices and increase profits Signup and view all the answers

What is a disadvantage of an oligopolistic market structure?

Higher prices and lower output Signup and view all the answers

What is a consequence of collusion in an oligopolistic market?

Potential exploitation of consumers Signup and view all the answers

What is the term for a dominant firm setting the price, and other firms setting their prices close to it?

Price leadership Signup and view all the answers

What is an advantage of an oligopolistic market structure?

Greater choice for consumers Signup and view all the answers

Study Notes

Oligopoly Characteristics

High concentration ratio: a small number of large firms dominate the market, such as the grocery market where Lidl, Aldi, and Dunnes Stores have significant market share.
Product differentiation: firms supply goods or services that are close but not perfect substitutes, resulting in unique offerings that distinguish them from competitors.

Firm Interdependence

Interdependent firms: companies consider the likely reactions of competitors when making decisions, especially regarding price, to maintain a competitive edge.

Barriers to Entry

Economies of scale: large firms have an advantage due to their scale of production, making it difficult for new entrants to compete.
High startup costs: the cost of setting up a new business is prohibitively high, deterring potential entrants.
Brand loyalty: strong customer loyalty to established brands makes it challenging for new firms to gain traction.
Brand proliferation: offering many variations of a product or service (e.g., Coca-Cola) creates a barrier to entry for new firms.
Limit pricing: established firms set prices low enough to discourage new entrants.

Non-Price Competition and Collusion

Non-price competition: firms compete using advertising, product differentiation, and other strategies rather than relying solely on price.
Collusion: firms secretly agree to fix prices, restrict output, or engage in other anti-competitive practices to harm consumers.

Alternative Aims

Aims other than profit-maximisation: firms may prioritize avoiding extra taxes, sales maximisation, or discouraging others from entering the market over profit maximisation.

Regulation of Oligopolies

Role of Competition and Consumer Protection Commission (CCPC)

Investigates anti-competitive behaviour and breaches of the Competition Act
Collaborates with the Director of Public Prosecutions to bring prosecutions
Assesses mergers and takeovers to ensure fair competition
Advocates for increased competition in the market
Educates consumers about their rights
Ensures compliance with product safety standards

Price Rigidity

In oligopolistic markets, prices tend to remain unchanged despite changes in production costs.
This is because increasing prices would lead to a decrease in sales, while decreasing prices could spark a price war.

Price Constancy

Involves maintaining the same price despite changes in production costs.
This approach is often adopted because changing prices can be costly, such as revising catalogues.

Limit Pricing

A strategy used by existing firms to deter new firms from entering the market.
Involves charging a lower price than possible to make it unprofitable for new firms to enter.
This practice is illegal.

Forms of Collusion

Collusion is a form of anti-competitive behavior where two or more competitors agree not to compete with each other, ultimately harming consumers, e.g., cartels.
Types of collusion:
- Limit Pricing
- Price Fixing: agreeing not to provide goods/services below a certain price
- Price Leadership: a dominant firm sets the price, and other firms set prices close to it
- Market Sharing: rival firms divide up sales territories, agreeing on locations where each firm will trade
- Restricting Output: e.g., OPEC (Organisation of the Petroleum Exporting Countries) does this legally

Oligopoly: Advantages and Disadvantages

Advantages

Firms have an incentive to innovate due to product differentiation
Economies of Scale are possible for large firms
Greater choice for consumers compared to a monopoly
Prices tend to be stable due to price rigidity

Disadvantages

Potential exploitation of consumers due to collusion
Costs of competitive advertising are passed onto consumers
Prices are higher, and output is lower compared to perfectly competitive markets

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Test your knowledge of the key features of oligopoly market structures, including concentration ratio, product differentiation, interdependent firms, and barriers to entry.