Oligopoly an Introduction

1. A2 Economics

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. 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. 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. 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. 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. 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. UK grocery market share 2008
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Tesco 30.9
Asda 17.1
Sainsbury's15.9
Morrisons 11.4
Co-op 4.2
Somerfield 3.9
Waitrose 3.8
Aldi 3
Independents2.5
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. 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. 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) Ltd1.9
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. You need to think back to arguments against monopolies.

12. 0% 20% 40% 60% 80% 100%
Sugar
Tobacco products
Oils and f ats
Gas distribution
Conf ectionary
Man-made f ibres
Coal extraction
Weapons and ammunition
Sof t 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. 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.

14. What harm can it do?

15. Oligopoly behaviour
Is your house loyal to one
supermarket?
Why?

16. On line shopping
Supermarket store website
Opening hours
 brand / product range
Non food products

23. 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

24. 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?

26. 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!

27. Great milk robbery Supermarkets admit price fixing

28. 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.

29. 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

30. 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.

31. 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.