Y2 25) Oligopoly Behaviour - Competition or Cartel?

Summary

This video script delves into the performance evaluation of oligopolies, contrasting competitive and collusive behaviors. Factors promoting competition include a large number of firms, easy market entry, cost advantages, homogeneous goods, and saturated markets. Conversely, collusive oligopolies thrive with few firms, similar costs, high entry barriers, and ineffective competition policy. The evaluation mirrors competitive market pros and cons for competitive oligopolies, and monopoly analysis for collusive ones, highlighting static and dynamic efficiency gains or losses.

Takeaways

• 🔍 In oligopolies, firms can exhibit either competitive or collusive behavior.
• 💡 Competitive oligopolies may arise from price wars and competition on non-price factors like branding and quality.
• 🤝 Collusive oligopolies can result from overt collusion, tacit collusion, or price leadership by a dominant firm.
• 👥 A large number of firms makes organizing collusion difficult, promoting competitive oligopoly.
• 🚫 Low barriers to entry discourage collusion by inviting new firms to take away supernormal profits.
• 💰 Firms with significant cost advantages struggle to fix prices or quantities, leading to competitive behavior.
• 🔄 Homogeneous goods reduce the ability to fix prices, pushing towards competitive oligopoly.
• 🈵 A saturated market with price wars discourages collusion due to the incentive to gain market share.
• 🤝 Few firms with similar costs can easily organize collusive agreements.
• 🚧 High entry barriers protect collusive oligopolies from new entrants, allowing collusion to persist.
• 🛡 Ineffective competition policy allows collusion to go unchecked, favoring collusive oligopolies.
• 💔 Consumer loyalty and inertia reduce the incentive to cheat on collusive agreements, supporting long-term collusion.
• 📊 Evaluating competitive oligopoly involves weighing the pros and cons similar to a competitive market.
• 📈 For collusive oligopoly, the evaluation follows the monopoly model, considering static and dynamic inefficiencies.

Q & A

What are the two types of oligopoly discussed in the video?

The video discusses two types of oligopoly: competitive oligopoly and collusive oligopoly.

What factors lead to a competitive oligopoly?

Competitive oligopoly is more likely when there are many firms, low barriers to entry, significant cost advantages by one firm, and homogeneous goods or a saturated market.

What is the role of price in competitive oligopoly?

In competitive oligopoly, firms often engage in price wars and compete on non-price factors such as branding, advertising, and product quality.

What are the characteristics of collusive oligopoly?

Collusive oligopoly can involve overt collusion with formal agreements to fix prices or quantities, tacit collusion with informal agreements not to engage in price wars, or price leadership where smaller firms follow the pricing decisions of a dominant company.

What promotes collusive oligopoly according to the video?

Collusive oligopoly is promoted by a small number of firms, similar costs among firms, high entry barriers, ineffective competition policy, consumer loyalty, and consumer inertia.

Why is collusion less likely to occur when there are many firms?

Collusion is less likely with many firms because organizing collusion becomes more difficult, and the benefits of collusion, such as supernormal profits, can attract new firms to enter the market.

How does consumer loyalty affect the likelihood of collusive oligopoly?

Consumer loyalty can reduce the incentive to cheat on collusive agreements because if a firm undercuts prices, it may not necessarily gain customers if consumers are loyal to other firms.

What is the difference between evaluating a competitive oligopoly and a collusive oligopoly?

A competitive oligopoly is evaluated based on the pros and cons of competitive market outcomes, while a collusive oligopoly is evaluated similarly to a monopoly, considering static inefficiencies and potential dynamic efficiency gains.

What is the significance of consumer inertia in maintaining collusive oligopoly?

Consumer inertia can prevent customers from switching suppliers, which reduces the incentive for firms to cheat on collusive agreements by undercutting prices, as they may not gain significant market share.

How does the presence of high entry barriers impact the stability of collusive oligopoly?

High entry barriers can stabilize collusive oligopoly by preventing new firms from entering the market and disrupting the collusive agreements, allowing the benefits of collusion to last longer.