You owe …. Monopsony Supermarket DR Q’s from textbook p342…
Intro to Oligopoly& market concentrations A2 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 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 • 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
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%
Market Share in Food Retailing What’s the concentration ratio of top 3? Or the top 5? Top 3 = 63.9% Top 5 = 79.5%
The Concentration Ratio in Hotels What’s the concentration ratio of top 3? Or the top 5? 3 firm concentration ratio = 49.4% 5 firm concentration ratio = 65.6%
Measuring the Concentration Ratio in Newspapers 2008 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.
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?
Is your house loyal to one supermarket? Why? Supermarkets Oligopoly behaviour
On line shopping Supermarket store website Opening hours brand / product range Non food products Supermarket non price competition
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 Oligopoly behaviour
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?
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.
Homework Read Oligopoly theory in textbook for Thursday Make notes on COLLUSION – formal & tactic