14.12.

2022

Oligopolies Continued

Tactic Collusion is Informal Collusion involving looking at the tactic of another and changing
decisions

Overt Collusion is Formal Collusion with both firms making a formal agreement to collude

Non-Collusive Oligopoly Pricing Strategy

Price Wars: when firms undercut each other’s price to the extent that one firm may reach their shut
down point and exit the industry. Flybe and Loganair were trying to take market share from each
other by lowering the price of tickets.

Predatory Pricing: When firms set price at a level low enough to force other firms out of the market.
For example, Norwegian Air is using cheaper slots at Gatwick so for existing firms like BA to change
their strategy or leave specific routes. *Predatory Pricing is below firm’s costs or ‘normal profit’

Limit Pricing: When incumbent firms have a cost advantage (possibly due to economies of scale) and
are able to set their price below the AC of new firms, limiting the entry of new firms in the market.
*Limit Pricing still contains profit for the firm (above firm’s costs)

Firms may increase capacity to excess

Evaluation of Limit Pricing

Large MNC may be willing to enter the market even if unprofitable in the short term, allowing them
to subsidise a loss-making entry

Instead of limit pricing, they may set the profit maximising price but react when a new firm enters

Limit pricing will be more effective in industries with substantial economies of scale

Non-Price Competition

Branding, Packaging, Special Features, Advertising, Sales Promotions, Personal Selling, Publicity,
Sponsorship Deals, Special Distribution such as free delivery & returns

Ex. 6

Advertising: Increases consumer awareness of the differences in the product

Branding: Improves the marketing and may attract consumers

Loyalty Schemes: Encourage consumer loyalty increasing likelihood of repeat customers

Sales Promotions: Encourages sellers to purchase more, increasing sales (free gifts/samples, referral
discounts, buy one get one free etc.)

Location: May increase sales if in more convenient location (such as Train Station) with heavy foot-
traffic and more potential consumers, comparative advantage

Quality Improvements: Improved quality will increase the likelihood of purchase from consumers
who value the good

Customer Service: Better customer service are going to encourage consumers to purchase as they
feel as though there is better quality and value of money increasing sales
Collusive Behaviour: behaviour between firms that will decrease costs as cartel members might
agree not to compete in price and instead agree on non-price competition

Social Media Presence/Stories

Delivery Times

Offering Bundles of Goods

Social/environmental/ethical/charity credentials

Paying for the best workers to give the firm a USP