Characteristics Of an Oligopoly Market
|High barriers to entry and exit
|High concentration ratio
|Interdependence of firms
The following table shows the value of UK Supermarket sales for the 3 months to the 31st March 2022.
|Value of Sales
Calculate the five-firm concentration ratio. Show your working.
Step 1: Identify the top five firms by value of sales & add the value of their sales together
Tesco (136.5) + Asda (77.5) + Sainsbury's (75) + Morrisons (55) + Aldi (44)
Step 2: Calculate the percentage of total sales that the top five firms have
Reasons For Collusion
|This makes it relatively easy for each firm to understand other competitors' actions & responses, or to collaborate on prices/output
|Firms face almost identical costs as any remaining competitors have all experienced economies of scale
|Competitors' goods/services sell for similar prices as there is little incentive to lower them as other firms would respond by keeping their market share the same but decreasing the profits
|High barriers to entry
|The barriers to entry make it unlikely that new entrants will emerge to disrupt the status quo
|A lack of regulation empowers firms to collude as there is little consequence for their actions
|There is usually a high degree of brand loyalty in oligopoly markets & firms have an established market share. This decreases the benefits of competition as consumers are unlikely to change brands
A prisoner's dilemma payoff matrix which illustrates game theory
A payoff matrix which illustrates the strategies & payoffs available to firms when they are deciding to advertise or not to advertise
The grid below shows the possible pricing strategies of two coffee companies. The Bean and Black Gold. Assuming that demand is price inelastic.
|The Bean's price
|Black Gold's price
Which of the following strategies in the grid would maximise the revenue of the two firms? Explain your answer.
Step 1: Use the information provided to select the correct option
Step 2: Explain your answer using economic knowledge
With reference to the revenue rule, firms whose demand is price inelastic should raise their price to maximise revenue. Due to the fact that consumers consider coffee a necessity, they will continue to pay the high prices. However, there is a strong likelihood that firms will charge a low price (D) as the payoff matrix carries the lowest risk. If firms do collusively or non-collusively decide to charge the high price, then B & C represent higher revenue for any firm that first decides to lower their price (their market share will increase)
A Range of Strategies Used in Non-Price Competition
|Loyalty cards & rewards
|Corporate sponsorship e.g. Nike sponsoring Rafael Nadal
|After sales service