Oligopoly

An oligopoly is a market structure where a few firms dominate, so they are highly interdenpedent.

Characteristics

• High barriers to entry
• A few firms dominate / high concentration ration
• Profit maximisation
• Interdependence between firms
• Non-price competition
• Strong branding exists
• Collusion likely

Examples

• Mobile phone networks
• Supermarkets
• Car manufacturers
• High street banks
• Film studios

Non-price competition

In an oligopoly, firms will engage in non-price competition, since if they lower prices, they are likely to enter a price war.

Examples:

• Marketing / Branding
• Loyalty schemes
• Promotions
• Quality
• Convenience

Kinked Demand Curve

The kinked demand curve demonstrates why there is non-price competition. Since there is interdependence, the other firms in the oligopoly will react rapdly to price changes.

If one firm drops their prices, the rest will follow, which leads to demand not increasing by much (Moving in the inelastic region).
If one firm raises their prices, the rest will keep their prices the same, and consumers will switch to other firms, causing a big drop in demand (moving in the elastic region).
This means that the most logical thing to do is keep the price the same.

Discontinuous MR

In oligopoly, there is a gap in MR between the two MC curves. This is because between these two cost curves, firms will not change their price. This is because if they raise prices, they will lose more customers and profit in comparison to keeping prices the same.
Alternatively, lowering prices would likely result in a price war, which would also mean lower profits.

Collusion

Collusion is where firms cooperate in their pricing and output policies. Firms are incentivised to collude because it allows them to eliminate risk, and gain the best outcome. (Prisoner's Dilemma)

Tacit Collusion

• Legal
• Firms follow a market leader / copy a large rival
• No communication occurs between the firms

Examples: Aldi price matching, Apple Airpods -> Galaxy pods.

Evaluation of the oligopoly model

• There are many examples of price competition - e.g Aldi
• Examples of new entrants to oligopolies - e.g Telsa, Disney+ (Large backing firm)
• Does not explain how firms arrive at the original price
• Does not account for the fact firms can test price changes to see if other prices react