·
A type of market structure where there are a
small number of firms dominating the market, all selling similar goods
·
What’s your definition of ‘dominating’ the
market? How do economists go about determining whether a market is dominated by
a few firms or not? They measure the concentration
ratio – the market share of the biggest firms in the market. For example, a
four firm concentration ratio shows the percentage of output produced in the
market by the four largest firms. Statistically, this method is okay to
use, but at A-level (and GCSE), it is better that you know that the essence of understanding the oligopoly
market is that firms in the market make decisions on price and output based on
the decisions of rival firms. They attempt to predict what the other firms are
doing, to compile their own strategy.
·
An example of an oligopoly market is
supermarkets
·
Can compete on price (resulting in a price war,
see here and here) or not, instead competing on other bases such as:
o Loyalty
schemes (Tesco Clubcard, Sainsbury’s Nectar points)
o Advertising
and marketing
o Home
delivery options (e.g. Asda and Tesco)
o Discounted
petrol (e.g. Asda, Morrisons)
o Extension
of opening hours (e.g. Metro Bank open on Sundays)
o Lateral
growth in other industries (Asda opticians, Tesco banking and insurance)
·
There are barriers to entry in the market
Kinked Demand Curve Theory
The theory explains how a competitive oligopolist may be
affected by rivals’ reactions to its price and output decisions.
The oligopolist sets price to P1 initially. When the curve is relatively elastic, if a firm in the
market increases the price, other firms will not
follow because the resulting fall in demand is greater than the proportionate
change in price. The firm loses too much demand to attract other firms to
follow.
When the curve is relatively
inelastic, if a firm lowers the price,
other firms will follow because they benefit from the resulting increase in
demand. Even though the resulting increase in demand is lower than the fall in
price, firms benefit because consumers ‘shop around’ for lower prices; if Tesco
are selling a notebook for £1 and Asda are selling a notebook for 80p, provided
that Asda is just as accessible as Tesco, the consumer may decide to shop at
Asda instead. This is under the assumption that the oligopoly market compete on
price. If this happens, a price war may
result.
Now consider the MR and MC curves. The oligopolist sets
price and output level to P1 and Q1. The profit maximising level of output is Q1.
The initial MC curve is MC2, but if the MC curve was to shift to
above MC1 or below MC3, the oligopolist would have to
charge a different price to ensure profit maximisation (assuming AR = selling
price). Price stability is achieved because
the MC curve can be anywhere between MC1 and MC3.
Furthermore contributing to price stability, the
oligopolist may decide to leave price and output at point X because of the uncertainty from rivals’ price and
output decisions.
The Kinked Demand Curve is only a theory and an estimate
of how demand changes when the oligopolist changes price because there is not
perfect information in the market for olipogolists to know the exact position
and shapes of their demand and revenue curves. The theory is useful because it
illustrates how firms are interdependent on rivals, and affected by
uncertainty.
No comments:
Post a Comment