Market Structures MCQ 4 (oligopoly)

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

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