Ocr Economics June 2012
Essay: Discuss how firms in Oligopoly are likely to compete with each other
Oligopoly is a market structure in which a few firm dominate the industry, it is an industry with a 5 firm concentration ratio of greater than 50%.
In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave
Barriers to entry are likely to be a feature of Oligopoly
There are different models to explain how firms may behave
The kinked demand curve model suggest firms will be profit maxi misers.
Kinked Demand Curve Diagram
[pic] At p1 if firms increased their price, consumers would buy from the other firms therefore they would lose a large share of the market and demand will be elastic. Therefore, firms will lose revenue from increasing price
If Firms cut Price then they would gain a big increase in Market share, however it is unlikely that firms will allow this. Therefore, other firms follow suit and cut price as well. Therefor,e demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall.
This model suggests price will be rigid because there is no incentive for firms to change the price
If prices are rigid and firms have little incentive to change prices they will concentrate on non price competition. This occurs when firms seek to increase revenue and sales by various methods other than price.
For example, a firm could spend money on advertising to raise the profile of their product and try and increase brand loyalty, if successful this will increase market sales. Advertising is a big feature of many oligopolies such as soft drinks and cars. Alternatively they could introduce loyalty cards or improve the quality of their after sales service. When buying a plane ticket price is not the only factor consumers look at, they may prefer airlines with more leg room, airmiles e.t.c.
Non price competition depends upon the nature of the product. For example, advertising is
Oligopoly is a market structure in which a few firm dominate the industry, it is an industry with a 5 firm concentration ratio of greater than 50%.
In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave
Barriers to entry are likely to be a feature of Oligopoly
There are different models to explain how firms may behave
The kinked demand curve model suggest firms will be profit maxi misers.
Kinked Demand Curve Diagram
[pic] At p1 if firms increased their price, consumers would buy from the other firms therefore they would lose a large share of the market and demand will be elastic. Therefore, firms will lose revenue from increasing price
If Firms cut Price then they would gain a big increase in Market share, however it is unlikely that firms will allow this. Therefore, other firms follow suit and cut price as well. Therefor,e demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall.
This model suggests price will be rigid because there is no incentive for firms to change the price
If prices are rigid and firms have little incentive to change prices they will concentrate on non price competition. This occurs when firms seek to increase revenue and sales by various methods other than price.
For example, a firm could spend money on advertising to raise the profile of their product and try and increase brand loyalty, if successful this will increase market sales. Advertising is a big feature of many oligopolies such as soft drinks and cars. Alternatively they could introduce loyalty cards or improve the quality of their after sales service. When buying a plane ticket price is not the only factor consumers look at, they may prefer airlines with more leg room, airmiles e.t.c.
Non price competition depends upon the nature of the product. For example, advertising is