The disadvantages of oligopolies Oligopolies can be criticised on a number of obvious grounds, including: If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. At profit maximising equilibrium, P, prce is above MC, and output, Q, is less than the productively efficient output, Q1, at point A.
Firms can be prevented from entering a market because of deliberate barriers to entry. It has been suggested that cost-plus pricing is common because a precise calculation of marginal cost and marginal revenue is difficult for many oligopolists.
The demand curve will be kinked, at the current price. Cartel-like behaviour reduces competition and can lead to higher prices and reduced output. Cost-plus pricing can also be explained through the application of game theory.
There is a tendency for cartels to form because co-operation is likely to be highly rewarding. Given the lack of competition, oligopolists may be free to engage in the manipulation of consumer decision making.
How expensive is it to introduce the strategy? In short, changing price is too risky to undertake. If firms do collude, and their behaviour can be proven to result in reduced competition, they are likely to be subject to regulation. Even when MC moves out of the vertical portion, the effect on price is minimal, and consumers will not gain the benefit of any cost reduction.
By making decisions more complex - such as financial decisions about mortgages - individual consumers fall back on heuristics and rule of thumb processes, which can lead to decision making bias and irrational behaviour, including making purchases which add no utility or even harm the individual consumer.
Covert Covert collusion occurs when firms try to hide the results of their collusion, usually to avoid detection by regulators, such as when fixing prices. This means keeping price artificially low, and often below the full cost of production. As with other deliberate barriers, regulators, like the Competition and Markets Authority CMAmay prevent this because it is likely to reduce competition.
Predatory acquisition Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out.
A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions.
Limit pricing Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price. Maximising profits If marginal revenue and marginal costs are added it is possible to show that profits will also be maximised at price P.
They may also operate a limit-pricing strategy to deter entrants, which is also called entry forestalling price. The demand curve is relatively inelastic in this context.
Oligopolists have to make critical strategic decisions, such as: Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level.
Hence, it can be regarded as a response to information failure. A strategy that takes five years to generate a pay-off may be rejected in favour of a strategy with a quicker pay-off.
There are three possible price strategies, with different pay-offs and risks:mi-centre.com Oligopoly 1 Oligopoly and Strategic Pricing In this section we consider how ﬁrms compete when there are few sellers — an oligopolistic. Ch. 17 Microeconomics.
STUDY. PLAY. true. The essence of an oligopolistic market is that there are only a few sellers. t/f. true. In a competitive market, strategic interactions among the firms are not important. t/f. oligopoly. The equilibrium quantity in markets characterized by oligopoly is. Lecture Strategic Interaction and Game Theory Office Hours This Friday: only, not In perfectly competitive markets (like the market for corn), firms do not compete with other firms games with any number of players can be analyzed.
Strategic Interaction>Conflict p 6. Strategic Interactions in Two-Sided Market Oligopolies. Strategic Pricing in Oligopoly Markets Ioana Chioveanu Advisor: Dr.
Xavier Vives Submitted in partial ful ﬁlment of the requirements for the degree of. opportunity of gaming to the market players. Game theory electricity markets are oligopoly in which the market performances are in-between perfect competition and theory,  investigated the strategic interactions among producers in electricity markets.
In addition to the traditional causes of market power.Download