OligopoliesA2 Economics

Starter: Recap on Concentration Ratios•Peer Mark Oligopoly Homework Questions 1,

2, 3.

Aims and ObjectivesAim:

• To understand the barriers to entry which face firms trying to

enter an oligopolistic market.

Objectives:

• Recap on concentration ratios.

• Define and describe barriers to entry.

• Analyse different barriers to entry in an Oligopolistic market.

• Evaluate the positive and negative effects of barriers to entry in

an oligopolistic market.

Imperfect Competition

What were the features of imperfect competition?

•Non homogenous goods.•Barriers to entry.•Imperfect knowledge.

Barriers to Entry

•Factors which prevent firms from entering a market.

•In an oligopoly barriers which exist are based on economies of scale.

Barriers to Entry – Firm Creation•In the absence of barriers to entry

existing through economies of scale in an oligopolistic market.

•Firms can create barriers to entry.

L A M

I N B

R

L: Limit and Predatory Pricing• The large oligopolistic firms have the lowest costs in

an industry.

• Economies of scale.

• These firms can use limit pricing as a barrier to entry.

• Firm lowers it’s prices to a level where other firms cannot compete.

• Driving them out of the industry. BACK

A: Advertising• Large firms can spread the costs of advertising, as

they produce thousands of units.

• New entrants to the market have to match that level of advertising expenditure.

• However they cannot produce as many units.

• Unit cost of advertising will be higher.

• http://www.youtube.com/watch?v=tcWJF9XvEVY&feature=related

BACK

M: Multiplicity of Brands•Large oligopolistic firms can sell a large

number of different products and brands.

•Targets multiple areas of the market.

•Therefore attracts more customers.

•Tesco stocks 20 varieties of apple!

BACK

I: Integration (combining two firms)• As oligopolists get larger they can integrate,

horizontally and vertically.

• This enables them to use predatory pricing more effectively.

• Economies of scale.

• http://www.youtube.com/watch?v=j8D6TXxL13IBACK

N: Non Price Competition• Strategies to persuade customers to buy goods,

without lowering prices.

• Tesco Clubcard

• 8 million users, most popular loyalty card in UK.

Reicheld and Teal (1996)• The greater the benefits for the customer, the more

years that customer will remain loyal.

• Customer loyalty is a key ingredient for success.BACK

B: Branding• Brands have unique

characteristics. Built over many years.

• Created through advertising.

• Making demand more inelastic. BACK

R: Research and Development• Increasing expenditure on R&D

• Firms can produce products which give them the edge over their competitors.

• Charge a higher price than their competitors.http://www.dyson.co.uk/insideDyson/article.asp?aID=rdd&imgID=rdd_02.jpg&asset=rdd_02.jpg&at=Image&hf=&js=

BACK

Positives and Negatives of Each Barrier to Entry

• Limit and Predatory Pricing

• Advertising

• Multiplicity of brands

• Integration

• Non-price competition

• Branding

• R&D

+-

Homework.

•Exam question 1b) Funeral Markets.

•Monday 15th November 2010.

•Find out the price of 2 pints of milk in your nearest supermarket.

How do dominant firms compete

with each other in an Oligopoly?