Collusive & Non-Collusive Oligopolies
Oligopolies are markets which have the following features:
- A few large firms
- Entry barriers
- Non price competition
- Product branding and differentiation
- Interdependence in decision making
This video explains collusive and non-collusive oligopolies.
Firms operating in oligopolies tend to invest heavily in new machinery and processes to try and reduce their cost structure and make more profits. Research and development expenditure is also high as businesses try and differentiate their products from their competitors.
Businesses in oligopolies use advertising and marketing to build strong brand recognition which allows them to compete on factors other than price and acts as a barrier to entry for new firms
Collusion occurs where the firms work together to reduce uncertainty in the market. Firms may become involved in price fixing or cartels to act as though they are the only firm in the market and therefore can set prices. This is illegal in the UK and EU
- Price fixing is where all firms in the market try and control supply to achieve a “monopoly” like situation
- For this to happen producers need to have an influence over supply
- This is most likely when the market is dominated by a few large firms, demand is inelastic, market demand doesn’t fluctuate and you can easily quantify the output of each firm
- Where one firm is dominant in the oligopoly they often take the role of price leader setting the price for the market
- Tacit collusion – is where companies are engaging in behaviours which minimise the response of competitors
- In the UK the supermarket business could be seen as behaving in a way similar to tacit collusion
In oligopolies the majority of competition is non-price. This aims to influence demand and build brand recognition.
- Better customer service
- Discounts on upgrades
- Free deliveries and installation
- Extended warranties
- Credit facilities
- Longer opening hours
- Product branding
- After sales service
Firms tend to compete on non price factors as competing on price can lead to price wars. Price wars occur when one competitor lowers its price, then others will lower their prices to match. If one of the firms reduces their price below the original price cut, then a new round of reductions is begins.
Oligopolies have a number of barriers to entry.
- Size of the firms in the market means they can influence output and price
- Larger firms can exploit economies of scale
- Branding and brand recognition