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

2. 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

3. 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

4. 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.

5. 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.