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Oligopoly
Features of Oligopoly
- An industry which is dominated by a few firms.
- UK definition of an oligopoly is a 5 Firm concentration ratio of more than 50% (this means they have more than 50% of the market share)
- Interdependence of Firms, firms will be effected by how other firms set price and output
- Barriers To Entry, but less than Monopoly
- Differentiated Products, advertising is often important
- Most Common Market Structure
Concentration Ratios:
This is a tool for measuring the market share of the 5 biggest firms in the industry. E.g. the 5 firm concentration ratio for supermarkets is about 58%
How Firms In Oligopoly are Expected to behave
There are different possible ways that firms in oligopoly will compete and behave this will depend upon
- the objectives of the firms e.g. profit max or sales max
- the degree of contestability i.e. barriers to entry
- government regulation
The Kinked Demand Curve Model
The Kinked Demand Curve Graph
- This assumes that firms seek to maximise profits
- IF they increase Price, then they will lose a large share of the market because they become uncompetitive compared to other firms, therefore demand is elastic for price increases.
- 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. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut
- Therefore this suggests that prices will be rigid in Oligopoly
The below diagram suggests that a change in Marginal Cost still leads to the same price, because of the kinked demand curve( remember profit max occurs where MR = MC