Oligopolies A2 Economics. Barriers to Entry Write down as many barriers to entry in an oligopolistic...
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Transcript of Oligopolies A2 Economics. Barriers to Entry Write down as many barriers to entry in an oligopolistic...
OligopoliesA2 Economics
Barriers to Entry
•Write down as many barriers to entry in an oligopolistic market as you can.
•With short description.
Aims and Objectives
Aim:
• To understand firm behaviour in an oligopoly.
Objectives:
• Define the different barriers to entry in an oligopolistic
market.
• Explain the behaviour of firms in an oligopolistic market.
• Analyse the kinked demand curve.
• Evaluate the kinked demand curve’s relevance .
Competitive Oligopoly (imperfect).•Rival firms are interdependent.
•They must take account of the reactions of
rival firms when deciding a market
strategy.
•They decide their strategies without
co-operation and collusion.
•Firms are uncertain of other firms
reactions.
Kinked Demand Curve Theory
• How competitive oligopolists are affected by rival’s
reaction to price and output decisions.
• Firms that change their prices may be punished by the
reactions of their competitors.
• Explains why there is a lack of price competition among
firms and why prices remain stable in an oligopoly.
Kinked Demand Curve Theory
• Initial output of OB and initial price of OA.
• If the firm increases it’s price above OA, it’s competitors
will leave their prices where they are.
• The firm will suffer a reduction in sales, profit, and
market share.
• To what extent depends on the firms’ brand loyalty.
Kinked Demand Curve Theory
•Firm lowers it’s price below OA, the
demand curve becomes inelastic.
• If a firm lowers it’s price, total revenue will
fall.
•All other firms will lower their prices.
•Could create a price war.
Kinked Demand Curve: Price War•Below the price OA, a price war may occur.
•Leading to an inelastic demand curve as
firms copy.
• If firms lower their prices, the resulting
price war, will lead to total revenue falling.
•Firms who compete like this may incur
losses.
Kinked Demand Curve Theory
• Firms prefer to stay at point X.
• They are fearful and uncertain of how rivals will
react to a change in price.
• The best policy may be to not compete on
price, and leave price unchanged.
Kinked Demand Curve and Stable Prices
•Second theory as to why prices are stable in an oligopoly.
•Marginal Revenue Curve.
•Vertical section at output Q1, shown by the distance B-C.
•This area links the MR curves associated with the AR curves.
Kinked Demand Curve and Stable Prices
• Initial marginal costs are MC1, pt A.
• The MC curve can rise or fall anywhere on the vertical.
• Doesn’t affect the profit maximising equilibrium of (Q1,P1).
• If marginal costs rise above MC2 at point B.
• Or falls below MC3 at point C.
• The profit maximising output changes.
Kinked Demand Curve and Stable Prices
•The oligopolist in both these cases would have to change their prices to maximise profits.
But..•The oligopolist’s selling price remains stable at
P1, if the Marginal Costs lie between MC2 and MC3.
•Oligopolists’ price remains stable, despite quite considerable changes in costs.
Criticisms of the Kinked Demand Curve
• No explanation of how and why a firm chooses in the first
place to be at point x.
• Theory only explains price competition, and not non-price
competition.
• Model assumes that oligopolists will react in a certain
manner and this is often not the case in reality.
• Under some circumstances firms may feel that they wish
to compete on price, reckoning that it is the strongest firm
in the market.