You owe ….

Monopsony Supermarket DR Q’s from textbook p342…

Intro to Oligopoly& market concentrationsA2 Economics

Key Issues

• Meaning of oligopoly

• Examples of oligopoly

• Understand the different market concentration ratios

What is an Oligopoly?

• 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!

What is an Oligopoly?

• 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

Examples of Oligopolies

• 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! Use

your whiteboards

To name a few examples of oligopolies

• 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

Oligopoly & Concentration ratios!

• 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. Normally an oligopoly exists when the top five firms in the market account for more than 60% of total market demand/sales.

Top 5 firms > 60%

UK grocery market share 2008

0

5

10

15

20

25

30

35

Tesco

Asda

Sainsb

ury's

Mor

rison

s

Co-op

Somer

field

Wai

trose Aldi

Inde

pend

ents

Lidl

Icela

nd

Other

sNet

to

Farm

food

s

Market Share in Food Retailing

What’s the concentration ratio of

top 3?Or the top 5?

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 0.5Top 3 = 63.9% Top 5 = 79.5%

The Concentration Ratio in Hotels

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?

Measuring the Concentration Ratio in Newspapers 2008

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%

So what’s the problem with a high concentration ratio?

You need to think back to arguments against monopolies.

UK industry with greatest market dominance (2004)

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%

Concentration ratio & market share

• 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.

Oligopoly power

• What harm can it do?

Supermarkets

Oligopoly behaviour

Is your house loyal to one supermarket?

Why?

Supermarket non price competition

• On line shopping

• Supermarket store website

• Opening hours

• brand / product range

• Non food products

Sainsburys

Waitrose

Asda

Tesco

So what extras do the supermarket websites offer?

The main features of Oligopoly behaviour….

Oligopoly behaviour

• Non price competition

• Price rigidity

• L shape cost curve (flat bottom!)

• Collusion

• Can you remember some industries that are ‘oligopolistic’?

• Petrol

• Hotel

• DIY

• Electrical Retailing

• Package Holidays

• Banks

• Phone

• Soft drinks

Price rigidity…

• 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?

www.whatgas.com

L shape cost curve (flat bottom!)

• Draw me a LRAC curve

• Do you think that the optimum output is at just one point in output?

• Not really a U for oligopolies… it tends to be a |____| shape – due to economies of scale over a wide range of products.

Formal Collusion – forming a cartel.

• 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?

Great milk robbery Supermarkets admit price fixing

Tactic collusion

• 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.

Cartels

• 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

Famous cartels - OPEC

• The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization, 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 organization’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 stabilization 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.

Office of Fair trade definition…

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.

HomeworkRead Oligopoly theory in textbook for Thursday

Make notes on COLLUSION – formal & tactic