oligopoly

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Characteristics of Oligopoly

Most markets are imperfectly competitive
Most imperfectly competitive industries operate in an oligopoly market structure
- E.g., Banks, insurance companies, department stores, supermarkets, petrol retailers, sport stores etc.

Characteristics Of an Oligopoly Market

High barriers to entry and exit	High concentration ratio
Entering the industry is difficult due to the existing dominance of relatively few firms. Start-up costs tend to be high e.g. setting up a renewable energy company costs billions Leaving the industry is difficult due to the high level of sunk costs e.g. mobile phone companies are bidding billions on 5G auctions run by the Government. They cannot recoup this if they leave the industry	A concentration ratio reveals what percentage of the total market share a specific number of firms have A 10-firm concentration ratio reveals the total market share (concentration) of the top 10 firms in the industry A 5-firm concentration reveals the total market share (concentration) of the top 5 firms in the industry The higher the value – and the lower the number of firms – the more concentrated the market power in the industry e.g. the UK supermarket’s 5-firm concentration ratio is constantly around 67%
Interdependence of firms	Product differentiation
With relatively few competitors, firms study each other’s behaviour and are highly interdependent in their actions This interdependence generates the use of game theory	Products tend to be highly differentiated Occasionally products are similar (e.g. petrol). However, the brand around the product is highly differentiated to the point where consumers perceive it as different and are extremely brand loyal

Calculation of Concentration Ratios

The most commonly used concentration ratios in the UK are the five-firm, ten-firm, and twenty-firm concentration ratios
A five-firm concentration ratio of around 60% is considered to be an oligopoly
A one-firm concentration ratio of 100% would be a pure monopoly
- The UK Competition and Markets Authority (CMA) defines a monopoly as a firm with more than 25% market share
  - It prevents mergers or acquisitions from taking place which would give one firm more than 25% market share

Worked Example

The following table shows the value of UK Supermarket sales for the 3 months to the 31st March 2022.

Company	Value of Sales (£ million)
Tesco	136.5
Morrisons	55
The Co-operative	30
Sainsbury’s	75
Aldi	44
Waitrose	24
Asda	77.5
Lidl	33
Iceland	15
Others	10
	500

Calculate the five-firm concentration ratio. Show your working.

Step 1: Identify the top five firms by value of sales and add the value of their sales together

Tesco (136.5) + Asda (77.5) + Sainsbury’s (75) + Morrisons (55) + Aldi (44)

$equals space 136.5 plus 77.5 plus 75 plus 55 plus 44 equals space £ 388 space million$

Step 2: Calculate the percentage of total sales that the top five firms have

$388 over 500 space cross times space 100 CR 5 equals space 77.6 percent sign$

Reasons For Collusive and Non-collusive Behaviour

Collusive behaviour in oligopolies occurs when firms cooperate to fix prices and restrict output
- They cease to compete as vigorously as they can
Non collusive behaviour in oligopolies occurs when firms actively compete to maintain/increase market share

Reasons For Collusion

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Similar revenue
Few firms/competitors	This makes it relatively easy for each firm to understand other competitors’ actions and responses, or to collaborate on prices/output
Similar costs	Firms face almost identical costs as any remaining competitors have all experienced economies of scale

Economics_A-level_Edexcel

oligopoly

Characteristics of Oligopoly

Calculation of Concentration Ratios

Worked Example

Reasons For Collusive and Non-collusive Behaviour

Responses