Oligopoly A few large interdependent firms dominate an industry High concentration ratios (eg. 5-firm conc. Ratio = 80%) Collusion can occur (bad for consumers)

Types of Collusion Cartel: firms make formal agreements to fix price and/or output (eg. OPEC) – illegal in the UK Secret collusion: firms agree secretly to fix price and/or output to gain mutual benefit – illegal in the UK Tacit collusion: firms act as if they have made an agreement but have not discusses this fact – “price leadership” means firms tend to following the pricing decisions of the dominant firm in the group

Oligopoly – the kinked demand curve Price Quantity Demand P profit max Q profit max So, profit maximising price is where the demand curve kinks. Elastic: if the firm raises price, consumers will switch to competitors – large ↓ Qd → ↓ Revenue Inelastic: if the firm lowers price, other firms will do the same – very small ↑ Qd → ↓ Revenue

Oligopoly – the curves (2)! Price Quantity Demand = ARMR MC MC 2 MC 1 P profit max Q profit max Due to the fact that there is one price which is so much better than others, there will be a range of MC curves for which this price will be the profit maximising output. Only if MC rises or falls significantly (outside this range) will the best price change.

Non-Price Competition Due to the fact that firms cannot manipulate their price to increase market share, price wars can be very detrimental oligopoly firms tend to engage in non-price competition Eg. promotions, give-aways, service, packaging, loyalty points etc.