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Oligopoly 1 (introduction)

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Oligopoly

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Oligopoly 1 (introduction)

  1. 1. A2 Economics
  2. 2.  At the end of the lessons, students should:  Understand the key characteristics of oligopolistic market structures.  Understand the makeup of one industry and be able to comment on the extent to which it represents characteristics of an oligopolistic market structure .  Be able to carry out effective research skills using a range of resources .
  3. 3.  Oligopoly is best defined by the market conduct (behaviour) of firms  A market dominated by a few large firms I.e. “Competition amongst the few”  High level of market concentration  Concentration ratio is the market share of the leading firms  Each firm tends to produce branded / differentiated products Key issue is behaviour of a few!
  4. 4.  Sets up Barriers to Entry  Aims to create long run supernormal profits  Mutual interdependence between competing firms (important)  Intensive non-price competition is common  Periodic aggressive price wars  Exploitation of economies of scale
  5. 5.  Petrol Retailing  National Food Retailers  Hotel Industry  DIY Retail Sector  Electrical Retailing  Package Holiday Companies  Leading Commercial Banks  Telecommunications Industry  Pharmaceutical companies  Soft drinks manufacturers  Low cost airlines  Computer games console manufacturers Orange competes in an oligopoly – there is intense price and non-price competition for customers Each of you are to take one of these business areas and see if you can name the top 5 companies!
  6. 6.  Groceries - dominated in the UK by Asda/Wal Mart, Tesco, Sainsbury and Safeway/Morrisons  Chemicals/oils - wide definition of the term chemical but key players are Shell, Exxon, GlaxoSmith Klein, ICI, Kodak, Astra-Zeneca, BP, DuPont, BASF and Bayer  Brewers - Interbrew, Scottish and Newcastle, Guinness, and Carlsberg Tetley have a four firm concentration ratio of 85%!  Fast food outlets - McDonalds, Burger King, KFC  Bookstores - Amazon, Barnes & Noble, Borders, Blackwells, Waterstones  Detergents - Unilever and Proctor and Gamble  Music retailing - HMV, Tesco, I Tunes, Tower, Amazon, MVC  Banks - NatWest, Barclays, HSBC, Lloyds TSB  Entertainment - Time-Warner, BMG,  Electrical retail - Dixons, Currys, Comet  Electrical goods - Sony, Hitachi, Panasonic, Canon, Bush, Fuji  Mobile phone networks - O2, Vodafone, Orange, T-Mobile  Home DIY - B&Q, Focus, Homebase
  7. 7.  An oligopoly is an industry where there is a high level of market concentration.  The concentration ratio measures the extent to which a market or industry is dominated by a few leading firms.
  8. 8. UK grocery market share 2008 0 5 10 15 20 25 30 35 Tesco Asda Sainsbury'sM orrisons C o-op Som erfieldW aitrose Aldi Independents LidlIceland O thers N etto Farm foods Tesco 30.9 Asda 17.1 Sainsbury's 15.9 Morrisons 11.4 Co-op 4.2 Somerfield 3.9 Waitrose 3.8 Aldi 3 Independents 2.5 Lidl 2.3 Iceland 1.7 Others 1.7 Netto 0.8 Farmfoods 0.5 What’s the concentration ratio of top 3? Or the top 4? Top 3 = 63.9% Top 5 = 79.5%
  9. 9. Market Share in the United Kingdom Hotel Sector Best Western 20.2 Whitbread 18.5 Compass 10.7 Six Continents 10.2 MacDonald 6 Corus & Regal 5.1 Choice 4.9 Hilton 4.6 Jarvis 3.6 Accor 3.5 Thistle Hotels 3.1 Moat House 2.4 3 firm concentration ratio = 49.4% 5 firm concentration ratio = 65.6% What’s the concentration ratio of top 3? Or the top 5?
  10. 10. Firm Market Share % News International Ltd 36.3 Associated Newspapers Ltd 21.7 Trinity Mirror plc 13.8 Express Newspapers Ltd 13.5 Telegraph Group Ltd 8.4 Guardian Newspapers Ltd 3.1 Independent Newspapers (UK) Ltd 1.9 Financial Times Ltd 1.4 What’s the concentration ratio of top 3? Or the top 5? Top 3 = 71.8 % Top 5 93.7%
  11. 11. You need to think back to arguments against monopolies.
  12. 12. 0% 20% 40% 60% 80% 100% Sugar Tobacco products Oils and fats Gas distribution Confectionary Man-made fibres Coal extraction Weapons and ammunition Soft drinks and mineral w aters Pesticides Sugar 99% Tobacco products 99% Oils and fats 88% Gas distribution 82% Confectionary 81% Man-made fibres 79% Coal extraction 79% Weapons and ammunition 77% Soft drinks and mineral waters 75% Pesticides 75%
  13. 13.  Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:  Perfect competition, with a very low concentration ratio.  Monopolistic competition, below 60% for the five-firm measurement.
  14. 14.  What harm can it do?
  15. 15. Oligopoly behaviour Is your house loyal to one supermarket? Why?
  16. 16.  On line shopping  Supermarket store website  Opening hours  brand / product range  Non food products
  17. 17.  Non price competition  Price rigidity  Collusion  Price Wars (occasional)  Can you remember some industries that are ‘oligopolistic’?  Petrol  Hotel  DIY  Electrical Retailing  Package Holidays  Banks  Phone  Soft drinks
  18. 18.  Despite changes in costs of production, oligopoly prices appear to remain at a constant level  Consider petrol prices…. Very rarely different within a geographical area… collusion or market forces?
  19. 19.  Oligopolies do compete against each other - known as non –collusive behaviour.  However, there is an incentive to collude.  Formal collusion - is where firms set up an agreement between each other – they create a cartel!
  20. 20. Great milk robbery Supermarkets admit price fixing
  21. 21.  This is not illegal  It is where competitive firms monitor each other’s behaviour closely and refrain from competing on price.  This is often seen as price leadership where competitors follow the dominant firm’s lead.
  22. 22.  Where a few firms dominate they could set an agreement on price, quantities for supply, service standards etc  The collusion restricts output  The collusion raises prices  The collusion raises abnormal profits
  23. 23.  The Organisation of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organisation, currently consisting of 12 oil producing and exporting countries, spread across three continents America, Asia and Africa.  The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, the Socialist People’s Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & Venezuela.  The organisation’s principal objectives are:  1. To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests;  2. To seek ways and means of ensuring the stabilisation of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations; and  3. To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry.
  24. 24. Typically, cartel members may agree on:  prices  output levels  discounts  credit terms  which customers they will supply  which areas they will supply  who should win a contract (bid rigging). Confess your cartel: Individuals can be sent to prison for up to five years and businesses can be fined up to 10 per cent of worldwide turnover.
  • TigereMuzenda1

    Oct. 10, 2016

Oligopoly

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