An oligopoly (from Ancient Greek ὀλίγος (olígos), meaning "few", and πωλεῖν (polein), meaning "to sell") is a market

form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result
from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopoly has its
own market structure.[1]
With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the
decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by
oligopolists needs to take into account the likely responses of the other market participants.

Profit maximization conditions
An oligopoly maximizes profits.
Ability to set price
Oligopolies are price setters rather than price takers.[2]
Entry and exit
Barriers to entry are high.[3] The most important barriers are government licenses, economies of scale,
patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to
discourage or destroy nascent firms. Additional sources of barriers to entry often result from government
regulation favoring existing firms making it difficult for new firms to enter the market.[4]
Number of firms
"Few" – a "handful" of sellers.[3] There are so few firms that the actions of one firm can influence the actions
of the other firms.[5]
Long run profits
Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering
market to capture excess profits.
Product differentiation
Product may be homogeneous (steel) or differentiated (automobiles).[4]
Perfect knowledge
Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally
described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their
inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price,[3] cost and
product quality.
Interdependence
The distinctive feature of an oligopoly is interdependence.[6] Oligopolies are typically composed of a few large
firms. Each firm is so large that its actions affect market conditions. Therefore, the competing firms will be
aware of a firm's market actions and will respond appropriately. This means that in contemplating a market
action, a firm must take into consideration the possible reactions of all competing firms and the firm's
countermoves.[7] It is very much like a game of chess or pool in which a player must anticipate a whole
sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an
oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also
lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it
may want to know whether other firms will also increase prices or hold existing prices constant. This high
degree of interdependence and need to be aware of what other firms are doing or might do is to be

contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market
there is zero interdependence because no firm is large enough to affect market price. All firms in
a PC market are price takers, as current market selling price can be followed predictably to maximize shortterm profits. In a monopoly, there are no competitors to be concerned about. In a monopolisticallycompetitive market, each firm's effects on market conditions is so negligible as to be safely ignored by
competitors.
Non-Price Competition
Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product
differentiation are all examples of non-price competition.

Modeling[edit]
There is no single model describing the operation of an oligopolistic market.[7] The variety and complexity of the
models exist because you can have two to 10 firms competing on the basis of price, quantity, technological
innovations, marketing, and reputation. Fortunately, there are a series of simplified models that attempt to describe
market behavior by considering certain circumstances. Some of the better-known models are the dominant firm
model, the Cournot–Nash model, the Bertrand model and the kinked demand model.

Cournot–Nash model[edit]
Main article: Cournot competition
The Cournot–Nash model is the simplest oligopoly model. The model assumes that there are two “equally positioned
firms”; the firms compete on the basis of quantity rather than price and each firm makes an “output decision assuming
that the other firm’s behavior is fixed.”[8] The market demand curve is assumed to be linear and marginal costs are
constant. To find the Cournot–Nash equilibrium one determines how each firm reacts to a change in the output of the
other firm. The path to equilibrium is a series of actions and reactions. The pattern continues until a point is reached
where neither firm desires “to change what it is doing, given how it believes the other firm will react to any
change.”[9] The equilibrium is the intersection of the two firm’s reaction functions. The reaction function shows how
one firm reacts to the quantity choice of the other firm.[10] For example, assume that the firm 1’s demand function
is P = (M − Q2) − Q1 where Q2 is the quantity produced by the other firm and Q1 is the amount produced by firm 1,
[11]

and M=60 is the market. Assume that marginal cost is CM=12. Firm 1 wants to know its maximizing quantity and

price. Firm 1 begins the process by following the profit maximization rule of equating marginal revenue to marginal
costs. Firm 1’s total revenue function is RT = Q1 P = Q1(M − Q2 − Q1) = MQ1 − Q1 Q2 − Q12. The marginal revenue
function is .[note 1]
RM = CM
M − Q2 − 2Q1 = CM
2Q1 = (M − CM) − Q2
Q1 = (M − CM)/2 − Q2/2 = 24 − 0.5 Q2 [1.1]
Q2 = 2(M − CM) − 2Q1 = 96 − 2 Q1 [1.2]
Equation 1.1 is the reaction function for firm 1. Equation 1.2 is the reaction function for firm 2.
To determine the Cournot–Nash equilibrium you can solve the equations simultaneously. The
equilibrium quantities can also be determined graphically. The equilibrium solution would be
at the intersection of the two reaction functions. Note that if you graph the functions the axes
represent quantities.[12] The reaction functions are not necessarily symmetric.[13] The firms may

If the firm lowers price P < MC then it will be losing money on every unit sold.[14] A generalization of the Bertrand model is the Bertrand–Edgeworth model that allows for capacity constraints and more general cost functions.[18] The conjectural assumptions of the model are. competitors will not follow and the acting firm will lose market share and second if a firm lowers prices below the existing price then their competitors will follow to retain their market share and the firm's output will increase only marginally. each firm faces a demand curve kinked at the existing price.[16] The Bertrand equilibrium is the same as the competitive result.face differing cost functions in which case the reaction functions would not be identical nor would the equilibrium quantities. if the firm raises its price above the current existing price.[14] The model assumptions are:  There are two firms in the market  They produce a homogeneous product  They produce at a constant marginal cost  Firms choose prices PA and PB simultaneously  Firms outputs are perfect substitutes  Sales are split evenly if PA = PB[15] The only Nash equilibrium is PA = PB = MC. Bertrand model[edit] Main article: Bertrand competition The Bertrand model is essentially the Cournot–Nash model except the strategic variable is price rather than quantity. Kinked demand curve model[edit] Main article: Kinked demand According to this model. Neither firm has any reason to change strategy. If the firm raises prices it will lose all its customers.[17] Each firm will produce where P = marginal costs and there will be zero profits. not differentiable).[19] If the assumptions hold then:  The firm's marginal revenue curve is discontinuous (or rather. and has a gap at the kink[18]  For prices above the prevailing price the curve is relatively elastic[20]  For prices below the point the curve is relatively inelastic[20] .

Shell Canada. (Rogers Communications. In the mobile market there are three main operators. Bank of Montreal. three companies (Rogers Wireless. Toronto Dominion Bank. Australia[edit]  Most media outlets are owned either by News Corporation. in order to ensure the stability of Australia's banking system. Desjardins Group and National Bank of Canada) control the banking industry. Other brands are virtual network operators (VNO).The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity. Syncrude Canada. To an extent this oligopoly is enshrined in law in what is known as the "Four pillars policy". Canada[edit]  Seven companies (Royal Bank of Canada. Talisman Energy) India[edit] . Time Warner. Imperial Oil.[18] Thus prices tend to be rigid. there are now only a small number of manufacturers of civil passenger aircraft. With other mobile virtual network operators (MVNO) selling access to those three networks. or by Fairfax Media[21]  Grocery retailing is dominated by Coles Group and Woolworths. with unprecedented levels of competition fueled by increasing globalization.  Fixed line telecommunications products in Australia are primarily delivered by Telstra.[citation needed]  Banking is dominated by ANZ. though Brazil (Embraer) and Canada (Bombardier) have participated in the small passenger aircraft market sector. Suncor Energy. and Commonwealth Bank. Oligopolies have also arisen in heavily-regulated markets such as wireless communications: in some areas only two or three providers are licensed to operate. Canadian Imperial Bank of Commerce. Telus. Shaw Communications)  7 companies control the oil and gas market. (Husky Energy. barriers to entry have resulted in oligopolies forming in many sectors. NAB. Telstra.  As of 2008. Examples[edit] In industrialized economies. Market shares in an oligopoly are typically determined by product development and advertising. For example. Westpac. Bell Canada. Optus and Vodafone Hutchison Australia. Bell Mobility and Telus Mobility) share over 94% of Canada's wireless market.[22][23]  4 companies control the internet service provider market. Nexen. Bank of Nova Scotia. Optus or increasingly NBN Co.

RWE npower. Hindustan Petroleum. Sainsbury's.[28]  The television and high speed internet industry is mostly an oligopoly of seven companies: The Walt Disney Company. Hearst Corporation. and News Corporation. The petroleum and gas industry is dominated by Indian Oil. Anthem and Kaiser Permanente.  Six movie studios receive almost 87% of American film revenues. commonly known as the organisations providing communication services for the exchange of data between air-ground applications in the Commission Regulation (EC) No 29/2009.[27] United States[edit]  Many media industries today are essentially oligopolies. Viacom. Time Warner. Vodafone India.[30] This is not to be confused with cellular telephone manufacturing. T-Mobile. Verizon Wireless. HSBC.  Four wireless providers (AT&T Mobility. Comcast. as well as Tata Teleservices and Tata Sky. Halifax. European Union[edit]  The VHF Data Link market as air-ground part of aeronautical communications is controlled by ARINC and SITA. Idea Cellular. Centrica.[25]  The detergent market is dominated by two players. E. Reliance Petroleum.[29] See Concentration of media ownership. CBS Corporation. United Kingdom[edit]  Five banks (Barclays. Asda and Morrisons) share 74. Lloyds TSB and Natwest) dominate the UK banking sector. and Tata Power. they were accused of being an oligopoly by the relative newcomer Virgin bank. Scottish Power and Scottish and Southern Energy) share 95% of the retail electricity market.on.[26]  Six utilities (EDF Energy. Sprint Nextel) control 89% of the cellular telephone service market. Unilever and Procter & Gamble. Bharat Petroleum.  Most of the telecommunication in India is dominated by Airtel. an integral portion of the cellular telephone market as a whole. California's insured population of 20 million is the most competitive in the nation and 44% of that market is dominated by two insurance companies. Reliance Communications.[31] .4% of the grocery market. For example.  Healthcare insurance in the United States consists of very few insurance companies controlling major market share in most states.[24]  Four companies (Tesco.

Simon & Schuster Inc. See Big Three (credit rating agencies).  Microsoft.[38]  General Electric. Hachette Book Group.  Intel and AMD are the only two major players in desktop CPU market worldwide. Sony.[35] Worldwide[edit]  The accountancy market is dominated by PriceWaterhouseCoopers.  Boeing and Airbus have a duopoly over the airliner market.  Aircraft tires is dominated by a four firm oligopoly that controls 85% of market share.  Nvidia and AMD together make most of the chips for discrete graphics. Penguin Group.  Nestlé. Valve. In March 2012.[citation needed]  Three credit rating agencies (Standard & Poor's. United Airlines. the United States Department of Justice announced that it would sue six major publishers for price fixing in the sale of electronic books. These three companies are often used as an example of "Rule of three". and Nintendo dominate the video game platform market.[37] which states that markets often become an oligopoly of three large firms. and Fitch Group) dominate their market and extend their crucial importance into the financial sector.[39] Demand curve[edit] . The accused publishers are Apple. Incorporated together make most of the confectionery made worldwide. KPMG. Moody's. Deloitte Touche Tohmatsu. together achieve a large proportion[vague] of global processed food sales. Southwest Airlines and American Airlines – which purposely do not compete on some air travel routes. Macmillan. Pratt and Whitney and Rolls-Royce plc own more than 50% of the marketshare in the airliner engine market. and HarperCollins Publishers. PepsiCo and Nestlé.[32][33][34]  Mergers among airlines have left the industry in the United States dominated by four main entities – Delta Air Lines. The Hershey Company and Mars. and Ernst & Young (commonly known as the Big Four)[36]  Three leading food processing companies. Kraft Foods.

The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market. so the less a producer earns per unit). firms use non-price competitionin order to accrue greater revenue and market share. eventually leading to a price war. With the fierce price competitiveness created by this sticky-upward demand curve. Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. marginal costs could change without necessarily changing the price or quantity. firms operate under imperfect competition. They are distinguished by a hypothesized convex bend with a discontinuity at the bend–"kink". the best option for the oligopolist is to produce at point Ewhich is the equilibrium point and the kink point. any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. demand is relatively elastic because all other firms' prices remain unchanged. demand is relatively inelastic because all other firms will introduce a similar price cut. as they are downwardsloping. This idea can be envisioned graphically by the intersection of an upwardsloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells. with the hope of gaining a larger market share as a result of now having comparatively lower prices. The curve is therefore moreprice-elastic for price increases and less so for price decreases. This is because competitors will generally ignore price increases. firms will not raise their prices because even a small price increase will lose many customers. In an oligopoly. However. Below the kink. This result does not occur if a "kink" exists. This is a theoretical model proposed in 1947. even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. In classical theory. the lower the price must be. Because of this jump discontinuity in the marginal revenue curve. "Kinked" demand curves are similar to traditional demand curves. which has failed to receive conclusive evidence for support. .Above the kink. Thus the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. Therefore. Theory predicts that firms will enter the industry in the long run.

more or less in tandem. in which three companies – Rogers Communications Inc (RCI). Rather than using price. Game theorists have developed models for these scenarios. firms may align in a number of different ways: the majority may keep prices low in an attempt to squeeze the firm with the highest price out of the market. This example shows that participants in oligopolies are often able to set prices. two or more firms dominate the market. the majority may raise prices. BREAKING DOWN 'Oligopoly' An example of an oligopoly is the wireless service industry in Canada. Tacit collusion. or they may each attempt to undercut the rest. Wireless carriers. requiring massive capital expenditures. is perhaps more common though more difficult to detect. was characterized by blatant collusion and price fixing. with the goal being to increase market share. which form a sort of prisoner's dilemma. or lease the incumbents' infrastructure at vampiric rates. when the leader raises prices. setting off aprice war that could damage them all. firms in oligopolies tend to prefer to useproduct differentiation. they are often indistinguishable in price: in early 2014 all three companies raised the price for smartphone plans to $80 in most markets. Canadians are conscious of this oligopolistic market structure and often lump the three together as "Robelus. An oligopoly in which participants explicitly engage in price fixing is a cartel: OPEC is one example. In fact. An oligopoly is similar to a monopoly. isolating the "cheating" firm and putting it under financial strain. except that rather than one firm. If that happens. must either build and maintain towers. interspersed with vicious price wars. for example. BCE Inc (BCE) subsidiary Bell and Telus Corp (TU) – control approximately 90% of the market. The alternative is for one or more firms to take advantage of the price rise by cutting prices and siphoning business away from the company with the highest price. The late 19th-century railroad cartel in the U. For this reason oligopolies are considered to be able increase profit margins above what a truly free market would allow. Most jurisdictions have laws against price fixing and collusion." as though they were indistinguishable. but the number must be low enough that the actions of one firm significantly impact and influence the others. The reason new entrants seldom come in to disrupt the market is that oligopolistic industries tend to have high barriers to entry. A stable oligopoly will often have a price leader. branding and marketing to compete. the others will follow.S. There is no precise upper limit to the number of firms in an oligopoly. In general. . rather than take them. a situation of (tacit) collusion on prices is considered to be the Nash equilibrium state for oligopolies. on the other hand.What is an 'Oligopoly' Oligopoly is a market structure in which a small number of firms has the large majority of market share.

When a market is shared between a few firms. but there are also many small airlines catering for the holidaymaker or offering specialist services.Carriers also tend to have strong. of the six firms in a hypothetical market: A = 56 B = 43 C = 22 D = 12 E=3 . "cartel"). it is said to be highly concentrated. they provide a distinct advantage over unknown new entrants. airlines. economists tend to identify the industry as an oligopoly. in £m. Even if these brands carry certain negative associations (ie. instantly recognizable brands. Other industries that have commonly seen oligopolies also have high barriers to entry: oil and gas drillers. major airlines like British Airways(BA) and Air France operate their routes with only a few close competitors. which measure the proportion of total market share controlled by a given number of firms. Concentration ratios Oligopolies may be identified using concentration ratios. Although only a few firms dominate. When there is a high concentration ratio in an industry. For example. Example of a hypothetical concentration ratio The following are the annual sales. grocers and movie studios are a few examples Oligopoly Defining and measuring oligopoly An oligopoly is a market structure in which a few firms dominate. it is possible that many small firms may also operate in the market.

Sky (at 22%) and TalkTalk (at 14%).3%.3 Further examples Cinema attendances Banking The Herfindahl – Hirschman Index (H-H Index) This is an alternative method of measuring concentration and for tracking changes in the level of concentration following mergers. making a four-firm concentration ratio of 86% (2015). BP.F=1 In this hypothetical case. If the index is below 1000.economicsonline. Source: OFCOM.catalyst. The H-H index is found by adding together the squared values of the % market shares of all the firms in the market.61%Morrisons: 11.55%Sainsbury: 11.comwww.92%Esso: 13. Esso.13%Shell: 15.6Morrisons9Sainsbury8. as shown below: Tesco: 19. Virgin Media (at 20%). Source: www. where X.4Esso10.co. while an index above 2000 indicates a highly concentrated market or industry – the higher the figure the greater the concentration.9Shell12. the 3-firm concentration ratio is 88. Morrisons and Sainsbury. Examples Fixed Broadband services Fixed broadband supply in the UK is dominated by four main suppliers .BT (with a market share of 32%). . Shell.26%BP: 19.7Total7. Y and Z are the percentages of the three firm’s market shares. Fuel retailing Fuel retailing in the UK is dominated by six major suppliers. if three firms exist in the market the formula is X2 + Y2+ Z2. that is 121/137 x 100.uk Tesco15BP14.17%Total: 9. the market is not considered concentrated. including Tesco. For example.37%UK petrol retailing market shares2012.

 Whether to be the first firm to implement a new strategy. . it must take into account the possibility that close rivals. Key characteristics The main characteristics of firms operating in a market with few close rivals include: Interdependence Firms that are interdependent cannot act independently of each other. or their non-price activity. may reduce their price in retaliation. and then try to improve on them or find ways to undermine them.Mergers between oligopolists increase concentration and ‘monopoly power’ and are likely to be the subject of regulation.  Whether to raise or lower price. For example. An understanding of game theory and the Prisoner’s Dilemma helps appreciate the concept of interdependence. Oligopolists have to make critical strategic decisions. Because firms cannot act independently. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. or keep price constant. they must anticipate the likely response of a rival to any given change in their price. such as Shell and BP. The advantages of ‘going first’ or ‘going second’ are respectively called 1st and 2nd-mover advantage. if a petrol retailer like Texaco wishes to increase its market share by reducing price. such as:  Whether to compete with rivals. Sometimes it pays to go first because a firm can generate head-start profits. Strategy Strategy is extremely important to firms that are interdependent. In other words. or collude with them. and work out a range of possible options based on how they think rivals might react. they need to plan. or whether to wait and see what rivals do. 2nd mover advantage occurs when it pays to wait and see what new strategies are launched by rivals.

because they increase break-even output. or they can exploit natural barriers that exist. This deters entry. Artificial barriers include: Predatory pricing .Barriers to entry Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. and delay the possibility of making profits. new entrants will have to match. this level of spending in order to compete in the future. which are costs that cannot be recovered when a firm leaves a market. and include marketing and advertising costs and other fixed costs. and is widely found in oligopolistic markets such as pharmaceuticals and the chemical industry. or exceed. High set-up costs High set-up costs deter initial market entry. Many of these costs aresunk costs. In order to compete. If a market has significant economies of scale that have already been exploited by the incumbents. Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry. These hurdles are called barriers to entry and the incumbent can erect them deliberately. Natural entry barriers include: Economies of large scale production. such as an airline controlling access to an airport. High R&D costs Spending money on Research and Development (R & D) is often a signal to potential entrants that the firm has large financial reserves. new entrants are deterred.

This signals to potential entrants that profits are impossible to make. regulators. have built up a superior level of knowledge of the market. Limit pricing Limit pricing means the incumbent firm sets a low price. Advertising Advertising is another sunk cost . like the Competition and Markets Authority (CMA).the more that is spent by incumbent firms the greater the deterrent to new entrants.Predatory pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market. and deters entry. may prevent this because it is likely to reduce competition. so that entrants cannot make a profit at that price. help oligopolists retain customer loyalty and deter entrants who need to gain market share. patents and licences . As with other deliberate barriers. and a high output. Superior knowledge An incumbent may. A strong brand A strong brand creates loyalty. This superior knowledge can deter entrants into the market. its customers. This is best achieved by selling at a price just below the average total costs (ATC) of potential entrants. over time. Predatory acquisition Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest. and its production costs. or by a complete buy-out. Loyalty schemes Schemes such as Tesco’s Club Card. Exclusive contracts. ‘locks in’ existing customers.

they are likely to be subject to regulation. which it acquired from the brewers Scottish and Newcastle in 2008. called acting in concert. Vertical integration Vertical integration can ‘tie up’ the supply chain and make life tough for potential entrants. rather than compete. and other firms simply follow the lead of this firm. Types of collusion Overt Overt collusion occurs when there is no attempt to hide agreements. For example. though regulators are becoming increasingly sophisticated in developing new methods of detection. Collusive oligopolies Another key feature of oligopolistic markets is that firms may attempt to collude. .These make entry difficult as they favour existing firms who have won the contracts or own the licenses. contracts between suppliers and retailers can exclude other retailers from entering the market. and a brewer like Heineken owning its own chain of UK pubs. All firms may ‘understand’ this. If firms do collude. If colluding. such as when fixing prices. For example. In many cases. usually to avoid detection by regulators. participants act like a monopoly and can enjoy the benefits of higher profits over the long term. and their behaviour can be proven to result in reduced competition. Covert Covert collusion occurs when firms try to hide the results of their collusion. such as the when firms form trade associations like the Association of Petrol Retailers. it may be accepted that a particular firm is the price leader in an industry. tacit collusion is difficult or impossible to prove. Tacit Tacit collusion arises when firms act together. but no agreement or record exists to prove it. but where there is no formal or even informal agreement. such as an electronics manufacturer like Sony having its own retail outlets (Sony Centres).

This leads to little or no gain. where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits.are calculated. Oligopolists may collude with rivals and raise price together. Oligopolists may use predatory pricing to force rivals out of the market. There are different versions of cost-pus pricing. and often below the full cost of production. and contribution pricing. which is also called entry forestalling price. but this may attract new entrants. They may also operate a limit-pricing strategy to deter entrants. where a firm sets a price by calculating average production costs and then adding a fixedmark-up to achieve a desired profit level.that is. oligopolists prefer non-price competition in order to avoid price wars. fixed and variable costs . a far more beneficial strategy may be to undertake non-price competition. Pricing strategies of oligopolies Oligopolies may pursue the following pricing strategies: 1. A price reduction may achieve strategic benefits. 3. or deterring entry. but the danger is that rivals will simply reduce their prices in response. but can lead to falling revenues and profits. such as gaining market share. including full cost pricing. Cost-plus pricing is also calledrule of thumb pricing. . Cost-plus pricing is a straightforward pricing method. Hence. This means keeping price artificially low. where all costs . 2. plus a mark up for profits.Competitive oligopolies When competing. 4.

This takes some of the risk out of pricing decisions. This could be considered a form of tacit collusion. as in the case of petrol retailers. If one firm uses cost-plus pricing .others may follow-suit so that the strategy becomes a shared one. Non-price strategies Non-price competition is the favoured strategy for oligopolists because price competition can lead to destructive price wars – examples include: . Costplus pricing is also common in oligopoly markets because it is likely that the few firms that dominate may often share similar costs. However. there is a risk with such a rigid pricing strategy as rivals could adopt a more flexible discounting strategy to gain market share. it can be regarded as a response to information failure. given that all firms will abide by the rule. or where uncertainty exists. Cost-plus pricing can also be explained through the application of game theory. It has been suggested that cost-plus pricing is common because a precise calculation of marginal cost and marginal revenue is difficult for many oligopolists.perhaps the dominant firm with the greatest market share .Cost-plus pricing is very useful for firms that produce a number of different products. Hence. which acts as a pricing rule.

sponsorship and product placement . 5. Each strategy can be evaluated in terms of: 1. including Barclays Bank and Carling.also called hidden advertising – is very significant to many oligopolists. once a price has been determined. How long will it take to work? A strategy that takes five years to generate a pay-off may be rejected in favour of a strategy with a quicker pay-off.mover advantage? 4. This is largely because firms cannot pursue independent strategies. is associated with the large supermarkets. which is a highly oligopolistic market. such as offering extended guarantees. clearly it will be rejected. such as buy-one-get-one-free (BOGOF). Rivals have no need to follow suit because it is to their competitive advantage to keep their prices as they are. willstick it at this price. The UK's football Premiership has long been sponsored by firms in oligopolies. For example.1. . which are common in the supermarket sector. if an airline raises the price of its tickets from London to New York. How successful is it likely to be? 2. 4. dominated by three or four large chains. Trying to improve quality and after sales servicing. Will the firms get a 1st . Will rivals be able to copy the strategy? 3. Loyalty schemes. 2. Spending on advertising. Sales promotion. Price stickiness The theory of oligopoly suggests that. 3. How expensive is it to introduce the strategy? If the cost of implementation is greater than the pay-off.the demand curve for the price increase is relatively elastic. rivals will not follow suit and the airline will lose revenue . such asSainsbury’s Nectar Card and Tesco’s Club Card.

Even when there is a large rise in marginal cost. will be also be different. . The elasticity of demand. and hence the gradient of the demand curve. if the airline lowers its price. the airline will lose sales revenue and market share. Kinked demand curve The reaction of rivals to a price change depends on whether price is raised or lowered.However. given the high price elasticity of demand for any price rise. The demand curve is relatively inelastic in this context. The demand curve will be kinked. Again. at the currentprice. price tends to stick close to its original. rivals would be forced to follow suit and drop their prices in response.

Even when MC moves out of the vertical portion. that is in terms of strategies and payoffs.At price P. revenue will be maximised. then profit maximisation is still at P. and consumers will not gain the benefit of any cost reduction. price still sticks at P. Furthermore. Maximising profits If marginal revenue and marginal costs are added it is possible to show that profits will also be maximised at price P. if MC changes in the vertical portion of the MR curve. Profits will always be maximised when MC = MR. There are three possible price strategies. A game theory approach to price stickiness Pricing strategies can also be looked at in terms of game theory. and so long as MC cuts MR in its vertical portion. and output Q. with different pay-offs and risks:  Raise price  Lower price  Keep price constant . the effect on price is minimal.

with members concealing their unlawful behaviour. In short. . Raising price or lowering price could lead to a beneficial pay-off. Examples of Oligopoly Oligopolies are common in the airline industry. which depends upon the actions of competitors. brewing. such as the hidden charges in credit card transactions 2. it may be the least risky strategy for an oligopolist. For example. Video The Prisoner’s Dilemma Game theory also predicts that: There is a tendency for cartels to form because co-operation is likely to be highly rewarding. Therefore. they may still operate.The choice of strategy will depend upon the pay-offs. While cartels are ‘unlawful’ in most countries. Co-operation reduces the uncertainty associated with themutual interdependence of rivals in an oligopolistic market. Higher prices or hidden prices. although keeping price constant will not lead to the single best outcome. and is usually identified as an oligopoly. is highly concentrated.supermarkets and music. which could be potentially disastrous. and the interests of consumers may suffer because of: 1. softdrinks. banking. but both strategies can lead to losses. as in the EU and USA. the manufacture. distribution and publication of music products in the UK. Cartels are designed to protect the interests of members. with a 4-firm concentration ratio of around 75%. changing price is too risky to undertake. Lower output 3. Restricted choice or other limiting conditions associated with the transaction A classic game called the Prisoner's Dilemma is often used to demonstrate the interdependence of oligopolists.

which can lead to decision making bias and irrational behaviour. 5. Oligopolists may be allocatively and productively inefficient. including making purchases which add no utility or even harm the individual consumer. and they dominate many sectors of the UK economy. oligopolists may be free to engage in the manipulation of consumer decision making. and output. at point A. At profit maximising equilibrium.The key players in 2011 were: Evaluation of oligopolies Oligopolies are significant because they generate a considerable share of the UK’s national income. Q1. Cartel-like behaviour reduces competition and can lead to higher prices and reduced output. Q. 2. P.such as financial decisions about mortgages . 6. There is a potential loss of economic welfare. Given the lack of competition. Oligopolies tend to be both allocatively and productively inefficient. Firms can be prevented from entering a market because of deliberatebarriers to entry. prce is above MC. . is less than the productively efficient output. 4. By making decisions more complex . 3.individual consumers fall back on heuristics and rule of thumb processes. including: 1. High concentration reduces consumer choice. The disadvantages of oligopolies Oligopolies can be criticised on a number of obvious grounds.

oligopolies may provide the following benefits: 1. Oligopolists may be dynamically efficient in terms of innovation and new product and process development. making the market uncompetitive. 2. Price stability may bring advantages to consumers and the macroeconomy because it helps consumers plan ahead and stabilises their expenditure. which may help stabilise the trade cycle. Even though there are a few firms. The super-normal profits they generate may be used to innovate. . in which case they can generate similar benefits to more competitive market structures. Oligopolies may adopt a highly competitive strategy. their behaviour may be highly competitive. in which case the consumer may gain.The advantages of oligopolies However. such as lower prices. 3.