Explain the main features of the behaviour of firms which operate in an oligopolistic market (10)

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Explain the main features of the behaviour of firms which operate in an oligopolistic market (10)

An oligopolistic market is one which has several main firms that dominate the market and the labour supply is concentrated around them. All firms are interdependent and the actions of one firm will directly affect another, all products are differentiated but there are close substitutes to them. Within the market there are high barriers to entry and exit and collusion may occur.

A firms behaviour in an oligoplistic market is much dependant on that of the other firms. As there is no competition on price they must compete on other aspects of the marketing mix such as place and promotions, this means that firms will have to invest into Research and Development in order to improve their product and make it seem more attractive to consumers. In an oligoplistic market there are no diseconomies of scale due to the L shaped average cost curve as firms cannot compensate for them because of the kinked demand curve.

Firms have to behave in this way as there is no room for price reductions as soon as one firm puts its prices down the other firms will lower their prices and this can lead to a price war.

The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable. The common assumption of the theory is that firms in an oligopoly are looking to protect and maintain their market share and that rival firms are unlikely to match another's price increase but may match a price fall. I.e. rival firms within an oligopoly react asymmetrically to a change in the price of another firm. If firm A raises price and others leave their prices constant, then we can expect quite a large substitution effect away from firm A making demand relatively price elastic. Firm A would lose market share and expect to see a fall in its total revenue. If firm A reduces price but other firms follow suit, the relative price change is much smaller and demand would be inelastic in respect of the price change. Cutting
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prices when demand is inelastic also leads to a fall in total revenue with little or no effect on market share.

The kinked demand curve model therefore makes a prediction that a business might reach a stable profit-maximising equilibrium at price P1 and output Q1 and have little incentive to alter prices. The kinked demand curve model predicts periods of relative price stability under an oligopoly with businesses focusing on non-price competition as a means of reinforcing their market position and increasing their supernormal profits. Short-lived price wars between rival firms can still happen under the

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Here's what a star student thought of this essay

This essay is structured very well, having a clear introduction and a strong conclusion including a justified judgement. Each paragraph adds something new to the argument, having a clear and concise signpost. I was impressed by the number of technical terms used, and the fluency of writing. The style allows for a very convincing argument.

The analysis in this essay is strong. The main components of an oligopoly are outlined in the introduction, which set a good tone for the essay. The explanation of the kinked demand curve is particularly strong, however I would've liked to have seen the term "prices are sticky" used. A few recent examples of collusion would've added to the argument, and the essay could've explored the concept of a cartel by doing this. For the first question, I wanted to see a bit more discussion about efficiency. There is no awareness that an oligopoly may not result in allocative efficiency or productive efficiency unlike other market structures. In the second question, the evaluation is also strong. The essay is able to identify why the broadcasting market shows signs of an oligopoly and then also explains why it isn't. I would've added that the oligopolistic market structure is just a model, as is any market structure, so it's difficult to place any real-life market within imposed definitions of its features. The strongest part of the essay is the last paragraph where it directly answers the question. A key phrase I would've used is "it depends upon" and I would've mentioned that it greatly depends upon the future of freeview channels and the strategy of the firms. It was pleasing to see game theory explored, as this is a higher level concept.

There are two questions here, but this essay handles them both superbly well. The first question displays strong analysis and the second shows good evaluative skills. It was nice to see some diagrammatical analysis, and some higher level concepts were explained well. There is a clear understanding of what constitutes an oligopoly, and the extent to which the broadcasting market can be considered one.