oligopoly quiz

advertising (4)

Advertising reduces a buyers' search time and minimizes these costs By providing information about competing goods, advertising diminishes monopoly power, resulting in greater economic efficiency By facilitating the introduction of new products, advertising speeds up technological progress. If advertising is successful in boosting demand, increased output may reduce long run average total cost, enabling firms to enjoy economies of scale.

Oligopoly

Common & important market structure, a few large firms producing a standardized, differentiated product, and dominate a market

Kinked-Demand Curve

Competitor and rivals strategize versus each other Consumers effectively have 2 partial demand curves and each part has its own marginal revenue part

Obstacles to collusion: (6)

Differing demand and cost conditions among firms in the industry A large number of firms in the industry The incentive to cheat Recession and declining demand (increasing ATC); The attraction of potential entry of new firms if prices are too high Antitrust laws that prohibit collusion.

Why three models?

Diversity of oligopolies Complications of interdependence

Barriers to entry (3)

Economies of scale- ATC falls Superior Technology and market share Huge Capital investment

The economic inefficiency may be lessened because (4)

Foreign competition has made many oligopolistic industries much more competitive when viewed on a global scale Oligopolistic firms may keep prices lower in the short run to deter entry of new firms Over time, oligopolistic industries may foster more rapid product development. greater improvement of production techniques than would be possible if they were purely competitive.

Cartel (4)

Formal written agreement - set price and output Market and profits are shared Illegal in the U.S. Cartels: Oligopolies- few firms Monopolies - price maker Example : OPEC - 13 nations- 40 %- production

oligopoly is an _____ market place

Interdependent

Three Oligopoly Models

Kinked-demand curve Collusive pricing Price leadership

Not all effects of advertising are positive (2)

Much advertising is designed to manipulate rather than inform buyers When advertising either leads to increased monopoly power, or is self-canceling, economic inefficiency results

Interdependent (3)

Mutually interdependent Any action on the part of one firm with respect to output, price, quality or product differentiation cause a reaction on the part of other firms.

Collusion and cartel agreements Overt Collusion (6)

Open agreement to fix prices, output and restrict competition . Advantage: increase profits, reduce uncertainty, prevent the entry of rival firms Agree to limit the quantity Identical demand and cost conditions Maximize the joint profits Price output monopoly

Price leadership (ex)

Price leadership in oligopoly occasionally breaks down and sometimes results in a price war. A recent example occurred in the breakfast cereal industry in which Kellogg had been the traditional price leader.

Several price leadership tactics are practiced by the leading firm. (4)

Prices are changed only when cost and demand conditions have been altered significantly and industry-wide Impending price adjustments are often communicated through publications, speeches, and so forth. Publicizing the "need to raise prices" elicits a consensus among rivals. The new price may be below the short-run profit-maximizing level to discourage new entrants

Oligopoly and Advertising (2)

Product development and advertising campaigns are more difficult to combat and match than lower prices . Oligopolists have substantial financial resources with which to support advertising and product development

Characteristics (4)

Small number of large firms Dominate the industry Set the prices Account for major percentage of total industry output

Covert Collusion (4)

Unwritten , informal understanding Verbal or tacit understanding - Fix price Violation of antitrust laws

Price and output are maximized at the ____

kink

Why are some industries dominated by a few firms?

lessens competition

Standardized & Differentiated

oligopolistic industries produce standardized products E.g. steel, zinc, copper, cement others produce differentiated products E.g. automobiles, detergents, greeting cards.

Other barriers to entry may exist

patents control of raw materials substantial advertising budgets traditional brand loyalty. Although some firms have become dominant as a result of internal growth, others have gained this dominance through mergers

Advertising can affect _____both ___ and ____

prices, competition, and efficiency pos and neg

Price leadership (4)

type of gentleman's agreement that allows oligopolists to coordinate their prices legally ; no formal agreements or clandestine meetings are involved. The practice has evolved whereby one firm, usually the largest, changes the price first and, then, the other firms follow.