1. IB ECONOMICS Unit 2 Micro Economics CH11: Oligopoly

2. Oligopoly: The Basics There are a few firms which dominate the market The concentration ratio: CR x –CR 4 would show the percentage of the market held by the largest four firms No clear definition of the size of market or CR required to determine an oligopoly market structure Easier to look at the behaviour of firms in the market to determine whether we are dealing with oligopolies The Herfindahl-Hirschman Index

3. The nature of oligopoly markets Some produce homogenous products Some produce highly differentiated products Some produce similar products but spend lots of time and money trying to convince us that they are different (P&G and Unilever) We may find low barriers to entry (See contestable markets) but we are likely to see large barriers such as branding Inter-dependence of firms is a key component and may lead to collusion Sometimes firms may compete vigorously to increase market share We do witness price rigidity both up and down in most markets classified as oligopolistic

4. Collusive oligopoly Formal Collusion – acting as a monopoly and dividing the profits –cartel e.g. EU Plastics industry –Results in higher prices and is deemed against the public interest –Usually banned by governments –Anti-trust legislation - Large fines for price fixing –Price rigidity –OPEC

6. Collusive oligopoly Tacit (informal) Collusion – acting as a monopoly and dividing the profits –The pricing strategies of dominant firms may be mirrored by others –Firms behave like a monopoly and enjoy abnormal profits (according to their mkt share) –Price rigidity

7. Non-collusive oligopoly Firms do not collude –They need to be aware of the others actions –Development of strategy –Game theory and behaviour of firms –Kinked demand curve (Paul Sweezy 1930s) –Expectations of others actions are crucial

8. Kinked demand Class Task: As a group draw the kinked demand curve faced by two petrol stations in the same town

9. Non-price competition In the absence of price competition and collusion firms try to erect barriers to protect their market share –Brand names –Special packaging –Sponsorship deals –After sales service –Etc. Nike and Addidas P&G and Unilever Coca-Cola: More than 400 brands world-wide

10. Extended Reading It is important that you conduct some extra reading, I want to see you in the library! Sloman J., Essentials of Economics 4 th Ed. (Available in the library) –132 to 148 IB Study Guide (You have a copy!) –49 to 51 AQA A2 Economics (Available on Website as PDF) –Chapter 5