- define oligopoly
- draw diagram
- explain diagram
- pros - non-price competition
- cons -
- wasted resources on advertising increases barriers to entry
- local monopolies
- misallocation of resources
A competitive oligopoly market consists of a few firms. Each of them most likely has similar market share. Barriers to entry and exit are likely to be high, there is likely to be some product diffetentiation, but as it is a competitive oligopoly firms would not have as much price making power as a monopoly would.
The kinked demand curve shows the price and quantity in a competitive oligopoly. This is a market with a few firms all competing with each other for market share, such as local coffee shops or local barber shops. The diagram shows that prices are sticky at p1 and won't change regularly. If firms tried to raise their prices, they would lose customers and lose revenue because consumers would go to their cheaper rivals who are selling similar products. If firms tried to lower their price, other firms would also immediately lower their price as well so firms would not gain any market share by doing this. Therefore, firms keep prices the same.
The benefit of this is that firms aim to gain market share through non-price competition. This means that they compete with each other to have the best advertising, quality, customer service, special offers and create brand loyalty. This benefits customers as they can choose from coffee shops or restaurants which are slightly different from each other and each one aims to have the best customer service. Customers often have a favourite fast food chain for this reason.
However, firms are still profit maximisers, and they may still seek to exploit customers by over-charging them. For example, Burger King is part of an oligopolistic market in terms of fast food, however they have local monopolies in many airports in the UK. They charge extremely high prices to take advantage of inelastic demand for food at the airport. Customers are forced to pay higher prices due to a lack of substitutes being available. However, this may not be purely due of the monopoly power of Burger King in the airport, but also because the airport is charging higher rent for that location. Furthermore, firms in a competitive oligopoly are dependent on strong advertising and brand loyalty, so firms waste a lot of resources on advertising budget to stand out or to keep up with competitors. Less competition would allow them to focus on re-investment and innovation, which may lead to better quality goods and services for customers to choose from.