oligopoly 1 (introduction)
TRANSCRIPT
A2 Economics
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 .
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 productsKey issue is
behaviour of a few!
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
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!
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
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.
UK grocery market share 2008
05
101520253035
Tesco
Asda
Sainsb
ury's
Morris
ons
Co-op
Somerf
ield
Wait
rose
Aldi
Indep
ende
nts Lidl
Icelan
d
Others
Netto
Farmfoo
ds
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%
Market Share in the United Kingdom Hotel SectorBest 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?
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%
You need to think back to arguments against monopolies.
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%
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.
Oligopoly, above 60% for the five-firm measurement.
Monopoly, with a near-100% four-firm measurement.
What harm can it do?
Oligopoly behaviour
Is your house loyal to one supermarket?
Why?
On line shopping Supermarket store website Opening hours brand / product range Non food products
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
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?
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!
Great milk robbery Supermarkets admit price fixing
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.
Where a few firms dominate they could set an agreement on price, quantities for supply, service standards etc
The collusion restricts outputThe collusion raises pricesThe collusion raises abnormal profits
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.
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.