Econ 3: Summary On Oligopolies

  • A Oligopolistic market is one that has a few firms dominating it 
  • When say dominating they all have a large market share and concentration ratio. E.g. A 5 firm conc ratio of 85% would mean they have 85% of the market share
  • However it is looked on that the conduct and behaviour of these firms shows their real characteristics.
  • There is a high degree of uncertainty from these group of firms : Do they compete or do they collude. THIS SHOWS THEY ARE INTERDEPENDENT
  • When competing- Non Price competition is the better option mainly because when with price there is a higher risk of losing out.
  • If they don’t price compete- they will have to collude which is the act of agreement between the firms. These firms can form a CARTEL. From Game theory- oligopoly firm would want to collude as it is the option with the less risk.
  • This can also be shown by the Kinked Demand Curve- Which shows the curve can be split into two parts. The top part shows that the price would be elastic as if the firm raises it price it would lead to other firms not increasing their price therefore could potentially lose market share. 
  • However it depends on the firm’s brand loyalty and also if it is the price leader because if it is other firms will tend to follow
  •  under Kinked demand curve theory the bottom half is said to be inelastic as when firms decrease its price due to the competitiveness other firms will also decrease their price. Therefore they would not really gain much demand and there is incentive because they would be making less profit. Therefore it is best to stick at the certain price. 
  • Developing the Kinked demand theory that marginal revenue can be added and like monopoly the MR is always under AR. However it is kinked and there is a middle gap also called the DIscontinous area. PROFIT MAXIMISATION is where MR = MC however if production costs increase e.g. raw material prices. The price would not be affected.
  • This shows in some kind that prices are stable in an Oligopolistic market.
  • LIMITATIONS: 2 significant points:

First it does not explain why the firm itself would pick that certain price as their fixed price.

Secondly the kinked demand theory does not reflect what real world firms would do as in reality firms would try to ‘test the market’ by either rising or lowering prices. 

Under some circumstances it might that firms themselves would benefit by competitng on price as the strongest firm likely in order to force rival firms out. Plus this theory ignores non price competition which is extremely important feature of oligopoly. 

 

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