4.1.3 Oligopoly


    Interdependence – the actions of one firm will have an effect on all the other firms.


    Because each firm has so much market power, the actions of one will have repercussions for the others and competing firms must be aware of each other’s actions and be ready to respond.


    In an oligopoly, if one firm cuts prices then other firms will follow suit and demand will remain price inelastic but if one firm raises prices, others will not do the same as for price raises demand is price elastic, so there is no benefit to raising or lowering prices as lowering prices will not gain market share. Therefore, in an oligopolistic market there is price stability.


    Tacit agreement – an informal understanding between large firms that they deliberately                               keep prices the same, (one may be a price-leader), in order to keep out                        competitors by making the market less contestable.


    Price discrimination – when the producer decides to charge different prices to different                                                   consumers for the same good/service.


    Price discrimination occurs in monopolies. There are certain conditions that must be met for price discrimination to work: there must be a different price elasticity of demand (PED) in each group, there must be barriers to stop consumers switching from one supplier to another or resale. You can charge higher prices to those with low PED and higher prices to those with high PED.


    There are three degrees of price discrimination:

    1st degree (perfect) price discrimination – this is when each individual consumer is separated and charged the price they are willing and able to pay, this can be known as optimal pricing and is when the firm charges whatever the market will bear.

    2nd degree price discrimination – when a firm sells off packages of a product deemed to be at surplus capacity at lower prices than previously advertised. This leads to supplementary profit for the firm by getting rid of excess stock when demand is low.


    3rd degree price discrimination – this is when consumers are split into sub-markets and these groups are charged different prices from each other. This is also classed as market segmentation e.g. peak and off-peak train tickets.


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