Study Notes
An oligopoly is a market structure where a few firms dominate the market, leading to interdependence among them. Barriers to entry and exit are high, and firms may engage in both price and non-price competition.
- Oligopoly — a market structure dominated by a small number of firms. Example: The automobile industry, where a few companies control most of the market.
- Barriers to Entry — obstacles that make it difficult for new firms to enter a market. Example: High startup costs or strong brand loyalty.
- Interdependence — the situation where the actions of one firm directly affect others. Example: If one airline lowers its prices, others may follow to remain competitive.
- Collusion — an agreement among firms to limit competition and increase profits. Example: Firms agreeing to fix prices or limit production.
- Price Competition — competing by lowering prices to attract customers. Example: A supermarket chain reducing prices to gain market share.
- Non-Price Competition — competing through means other than price, such as advertising or product quality. Example: A smartphone company investing in advertising to highlight its product features.
Exam Tips
Key Definitions to Remember
- Oligopoly
- Barriers to Entry
- Interdependence
- Collusion
Common Confusions
- Confusing oligopoly with monopoly, where only one firm dominates.
- Misunderstanding the difference between price and non-price competition.
Typical Exam Questions
- What are the costs and benefits of collusion to producers, consumers, workers, and government? Collusion can lead to higher prices and profits for producers but may reduce consumer choice and efficiency.
- Give three types of price competition that may be found in an oligopolistic market. Predatory pricing, price wars, and limit pricing.
- What is meant by interdependence of firms in an oligopoly? Firms' decisions affect each other, leading to strategic planning based on competitors' actions.
What Examiners Usually Test
- Understanding of how oligopolies operate and the role of interdependence.
- Ability to explain the impact of barriers to entry and exit.
- Knowledge of different types of competition within oligopolistic markets.