Essay on Oligopoly: Top 8 Essays on Oligopoly | Markets | Microeconomics
Here is a compilation of essays on โOligopolyโ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on โOligopolyโ especially written for school and college students.
Essay on Oligopoly
Essay Contents:
- Essay on Payoff (Profit) Matrix
Essay # 1. Introduction to Oligopoly:
ADVERTISEMENTS:
Two extreme market forms are monopoly (characterised by the existence of a single seller) and perfect competition (characterised by a large number of sellers). Competition is of two types- perfect competition and monopolistic competition. In perfect competition, all sellers sell homogeneous products while in monopolistic competition they sell heterogeneous products. In monopoly there is no rival.
So the monopolist is not concerned with the effect of his actions on rivals. In both types of competition, the number of firms is so large that the actions of any one seller have little, if any, effect on its competitors. An industry with only a few sellers is known as an oligopoly, a firm in such an industry is known as an oligopolist.
Although car-wash is a million rupee business, it is not exactly a product familiar to most consumers. However, often many familiar goods and services are supplied only by a few competing sellers, which means the industries we are talking about are oligopolies. An oligopoly is not necessarily made up of large firms. When a village has only two medicine shops, service there is just as much an oligopoly as air shuttle service between Mumbai and Pune.
Essentially, oligopoly is the result of the same factors that sometimes produce monopoly, but in somewhat weaker form. Honestly, the most important source of oligopoly is the existence of economies of scale, which give better producers a cost advantage over smaller ones. When these economies of scale are very strong, they lead to monopoly, but when they are not that strong they lead to competition among a small number of firms.
Since an oligopoly contains a small number of firms, any change in the firms’ price or output influences the sales and profits of competitors. Each firm must, therefore, recognise that changes in its own policies are likely to elicit changes in the policies of its competitors as well.
As a result of this interdependence, oligopolists face a situation in which the optimal decision of one firm depends on what other firms decide to do. And so there is opportunity for both conflict and cooperation. Oligopoly refers to a market situation in which the number of sellers is few, but greater than one. A special case of oligopoly is monopoly in which there are only two sellers.
Essay # 2. Characteristics of Oligopoly:
The notable characteristics of oligopoly are:
1. Price-Searching Behaviour :
An oligopolist is neither a price-taker (like a competitor) nor a price-maker (like a monopolist). It is a price-searcher. An oligopolist is neither a big enough part of the market to be able to act as a monopolist, nor a small enough part of the market to be able to act as a competitor. But each firm is a dominant part of the market.
In such a situation, competition among buyers will force all the sellers to charge a uniform price for a product. But each firm is sufficiently so large a part of the market that its actions will have noticeable effects upon his rivals. This means that if a single firm changes its output, the prices charged by all the firms will be raised or lowered.
2. Product Characteristics :
In oligopoly, there may be product differentiation as in monopolistic competition (called differentiated oligopoly) or a homogeneous product may be traded by all the few dominant firms (as in pure oligopoly).
3. Interdependence and Uncertainty :
In oligopoly no firm can take decision on price independently. It is because the decision to fix a new price or change an existing price will create reactions among the rival firms. But rivals’ reactions cannot be predicted accurately. If a firm reduces its price its rivals may reduce their prices or they may not. So there is lack of symmetry in the behaviour of rival firms.
This type of reaction of rivals is not found in perfect competition or monopolistic competition where all firms change their price in the same direction and by the same magnitude in order to remain competitive and survive in the long run. So the outcome of a firm’s decision is uncertain.
For this reason it is difficult to predict the total demand for the product of an oligopolistic industry. It is still more difficult, and in some situations virtually impossible, to estimate the share of an individual firm in industry’s output.
It is true that the consequences of attempted price variations on the part of an individual seller are uncertain. His rivals may follow his change, or they may not, but they will, in all likelihood, notice it. The results of any action on the part of an oligopolist or even a duopolist depend upon the reactions of his rivals. In short, it is not possible to define general price- quantity relations for an individual firm, since reaction patterns of rivals are highly uncertain and almost completely unknown.
4. Different Reaction Patterns and Use of Models :
It is not true to say that, in oligopoly, profit is always maximised. It is because an oligopolist does not have control over all the variables which affect his profit. Moreover, a variety of possible reaction patterns is possible in this marketโthere is a conjectural variation in this market.
Just as firm A’s profit depends on the output of firm B also, firm B’s profit, in its turn, depends on firm A’s output. This is why various models are used to describe the diverse behaviour of oligopoly markets where a variety of outcomes is possible.
5. Non-Price Competition :
As in monopolistic competition there is not only price competition but non-price competition as well in oligopoly (and, to some extent, in duopoly). For example, advertising is often a life and death question in this type of market due to strategic behaviour of all firms. In most oligopoly situations we find intermediate outcomes. Economists are yet to emerge with a definite behaviour pattern in oligopoly.
Essay # 3. Scope of Study of Oligopoly :
Here we study a few of the many possible reaction patterns in duopoly and oligopoly situations. The focus is on pure oligopoly. Here we assume that all firms produce a homogeneous product. We do not discuss the case of differentiated oligopoly and the issue of selling cost (advertising) separately. Of course, we discuss briefly Baumol’s sales maximisation hypothesisโwithout and with advertising.
The focus here is on the interdependence of the various sellers’ reactions, which is the essential distinguishing feature of oligopoly. If the influence of one seller’s quantity decision from the profit of another, ฮดฯ i /ฮดq j , is negligible, the industry must be either perfectly competitive or monopolistically competitive. If ฮดฯ i /ฮดq j , is perceptible, the industry is duopolistic or oligopolistic.
The optimum quantity and maximum profit of a duopolist or oligopolist depend upon the actions of the firms belonging to the industry. He can control only his own output level (or price, if his product is differentiated), but he has no direct control over other variables which are likely to (or do) affect his profits. In truth, the profit of each oligopolist is the result of the interaction of the decisions of all players in the market.
Since there are no generally accepted behavioural assumptions for oligopolists and duopolists as is found in other market forms, there are diverse patterns of behaviour and many different solutions for oligopolistic and duopolistic markets. Each solution is based on different types of models and each model is based on a different behavioural assumption or a set of assumptions.
Here we start with one or two simple duopoly models. The same analysis (solution) can be extended to cover any oligopolistic market. The earliest model of duopoly behaviour is the Cournot model, with which we may start our review of different oligopoly models. We end with the game theoretic treatment of oligopoly which shows decision-making under conflict.
Essay # 4. Models of Oligopoly:
1. the cournot model :.
The Cournot model (presented in 1838) is based on the analysis of a market in which two firms produce a homogeneous product. Augustin Cournot (a French economist) noticed that only two firms were producing mineral water for sale. He argued that each firm would choose quantity that would maximise profit, taking the quantity marketed by its competitor as given.
Two main features of the model are:
(i) Each firm chooses a quantity of output instead of price; and
(ii) In choosing its output each firm takes its rival’s output as given.
In Cournot’s model, then, strategies are quantities of output. Here we assume that firms produce a homogeneous good and know the market demand curve.
Each firm must decide how much to produce, and the two firms make their decisions at the same time. When taking its production decision, each duopolist takes into consideration its competitor. It knows that its competitor is also deciding how much to produce, and the market price will depend on the total output of both firms.
The essence of the Cournot model is that each firm treats the output level of its competitor as fixed and then decides how much to produce. Each Cournot’s duopolist believes that the other’s quantity will not change. In Fig. 1 when I produces Q M , II maximises its profit by producing 1/4Q C . In order to sell Q M plus Q c , the price must fall to P 1 . Here Q M is the monopoly output which is half the competitive output Q c .
The inverse demand function, stating price as a function of the aggregate quantity sold, is expressed as:
P =f (q 1 ) + q 2 … (1)
where q 1 and q 2 are the output levels of the duopolists. The total revenue of each duopolist depends upon his own output level as also as that of his rival:
R 1 = q 1 f 1 (q 1 + q 2 ) = R 1 (q 1 , q 2 )
R 2 = q 2 f 2 (q 1 + q 2 ) = R 2 (q 1 , q 2 ) โฆ (2)
The profit of each equals his total (sales) revenue, less his cost, which depends upon his output level above:
ฯ 1 = R 1 (q 1 , q 2 ) โ C 1 (q 1 )
ฯ 2 = R 2 (q 1 , q 2 ) โ C 2 (q 2 ) โฆ (3)
The basic behavioural assumption of the Cournot model is that each duopolist maximises his profit on the assumption that the quantity produced by his rival is invariant with respect to his own decision regarding output quantity. Duopolist I maximises ฯ 1 with reference to q 1 , treating q 2 as a parameter, and duopolist II maximises ฯ 2 , with reference to q 2 , treating q 1 as a parameter. Setting the partial derivatives of (3) equal to zero, we get:
The solution of (7) is
Here OM is the marginal cost of producing the commodity. The second firm’s price is p 2 . The first firm’s profit function is composed of three segments. When p 1 < p 2 , the first firm captures the entire market, and its profit increases as its price increases. When p 1 > p 2 , the two firms split the total profits equal to distance CA, and each makes a profit equal to CB. When p 1 >p 2 , the first firm’s profit is zero because it sells nothing when its price exceeds the second firm’s price.
Criticisms:
The Bertrand model has been criticised on two main grounds. First, when firms produce a homogeneous good, it is more natural to compete by setting quantities rather than prices. Second, even if firms do set prices and choose the same price (as the model predicts), what share of total sales will go to each one? The model assumes that sales would be divided equally among the firms, but there is no reason why this must be the case.
However, despite these shortcomings, the Bertrand model is useful because it shows how the equilibrium outcome in an oligopoly can depend crucially on the firms’ choice of strategic variable.
3. The Stackelberg Model :
The Stackelberg model (presented by the German economist Heinrich von Stackelberg) is a modified version of the Cournot model. In the Cournot model, we assume that two duopolists make their output decisions at the same time. The Stackelberg model examines what happens if one of the firms can set its output first. The Stackelberg model of duopoly is different from the Cournot model, in which neither firm has any opportunity to react.
The model is based on the assumption that the profit of each duopolist is a function of the output levels of both:
ฯ 1 = g 1 (q 1 , q 2 ) ฯ 2 = g 2 (q 1 , q 2 ) โฆ (1)
The Cournot solution is found out by maximising ฯ 1 with reference to q 1 , assuming q 2 to be constant and ฯ 2 with reference to q 2 , assuming q 1 to be constant. In general, each firm might make some other assumption about the response (reaction) of its only rival. In such a situation, profit-maximisation by the two duopolists requires the fulfillment of the following two conditions:
Since the firm’s demand curve is kinked, its combined marginal revenue curve is discontinuous. This means that the firm’s cost can change without leading to price change. In this figure, marginal cost could increase but would still equal marginal revenue at the original output level. This means that price remains the same.
The kinked demand curve model fails to explain oligopoly pricing. It says nothing about how marginal revenue firms arrived at the original price Pฬ to start with. In fact, some arbitrary price is taken as both the starting and end point of our journey. Why firms did not arrive at some other price remains an open question. It just describes price rigidity but cannot explain it. In addition, the model has not been supported by empirical tests. In reality, rival firms do match price increases as well as price cuts.
Market-sharing Price Leadership :
Oligopolists often colludeโjointly restrict supply to raise price and cooperate. This strategy can lead to higher profits. Collusion is, however, illegal. Moreover, one of the main impediments to implicitly collusive pricing is the fact that it is difficult for firms to agree (without talking to each other) on what the price should be.
Coordination becomes particularly problematic when cost and demand conditionsโand, thus, the ‘correct’ priceโare changing. However, benefits of cooperation can be enjoyed without actually colluding. One way of doing this is through price leadership. Price leadership may be provided by a low-cost firm or a dominant firm.
In this context, we may draw a distinction between price signalling and price leadership. Price signalling is a form of implicit collusion that sometimes gets around this problem. For example, a firm might announce that it has raised its price with the expectation that its competitors will take this announcement as a signal that they should also raise prices. If competitors follow, all of the firms (at least, in the short run) will earn higher profits.
At times, a pattern is established whereby one firm regularly announces price changes and other firms in the industry follow. This type of strategic behaviour is called price leadershipโ one firm is implicitly recognised as the ‘leader’. The other firms, the ‘price followers’, match its prices. This behaviour solves the problem of coordinating price: Everyone simply charges what the leader is charging.
Price leadership helps to overcome oligopolistic firms’ reluctance to change pricesโfor fear of being undercut. With changes in cost and demand conditions, firms may find it increasingly necessary to change prices that have remained rigid for some time. In that case, they wait for the leader to signal when and by how much price should change.
Sometimes a large firm will naturally act as a leader; sometimes different firms will act as a leader from time to time. In this context, we may discuss the dominant Firm model of leadership. This is known as market- sharing price leadership.
6. The Dominant Firm Model :
In some oligopolistic markets, one large firm has a major share of total sales while a group of smaller firms meet the residual demand by supplying the remainder of the market. The large firm might then act as a dominant firm, setting a price that maximises its own profits.
The other firms, which individually could exert little, if any, influence over price, would then act as perfect competitors; they all take the price set by the dominant firm as given and produce accordingly. But what price should the dominant firm set? To maximise profit, it must take into account how the output of the other firms depends on the price it sets.
Fig. 5 shows how a dominant firm sets its prices. A dominant firm is one with a large share of total sales that sets price to maximise profits, taking into account the supply response of smaller firms. Here D is the market demand curve and S F is the supply curve (i.e., the aggregate marginal cost curves of the smaller firms, called competitive fringe firms). The dominant firm must determine its demand curve D D .
This curve is just the difference between market demand and the supply of fringe firms. For example, at price P 1 , the supply of fringe firms is just equal to market demand. This means that the dominant firm can sell nothing at this price. At a price P 2 or less, fringe firms will not supply any of the good, in which case, the dominant firm faces the market demand curve. If price lies between P 1 and P 2 , the dominant firm faces the demand curve D D .
The marginal cost curve of the dominant firm corresponding to D D is MR D . The dominant firm’s marginal cost curve is MC D . In order to maximise its profit, the dominant firm produces quantity Q D at the interaction of MR D and MC D . From the demand curve D D , we find P 0 . At this price, fringe firms sell a quantity Q F , thus the total quantity sold is Q T = Q D + Q F .
7. Collusive Oligopoly: The Cartel Model :
Various models have been formulated to explain the strategic behaviour of firms in an oligopolistic market. A price (cut-throat) competition exists among the rivals who try to oust the others from the market. Sometimes there exists a dominant firm that acts as the leader in the market while the others just follow the leader.
As a result, there happens to be a clear possibility of the formation of a cartel by the rival firms in an oligopolistic market in order to eliminate competition among themselves. This is termed as “collusive oligopoly” because the firms somehow manage to combine together in order to behave collectively as a single monopoly.
Now let us see graphically what incentives the firms get for forming a cartel. In Fig. 6, the market demand curve is given by the D M the total supply curve is the horizontal summation of the marginal cost curves of all existing firms in the industry, which is denoted by MC M .
The market equilibrium is attained at the point of intersection between the D M (demand curve) and the marginal cost curve MC M , if the firms compete with each other. OP M is the equilibrium price at which the total output of the industry is OQ M .
In order to determine its own quantity, each firm equates this price to its marginal cost. The sum of the quantities of the firms is OQ. If the firms form a cartel in order to act as a monopolist, the price rises to OP ‘ M and the quantity is reduced to OQ ‘ M to be in equilibrium. Now, when the quantity is being reduced by Q M Q’ M , then all the firms together save the cost represented by the area below the MC M curve which is Q M E M F M Q ‘ M .
Thus, a rise in price due to a reduction in the quantity is followed by a decrease in the total revenue represented by the area below the MR M curve, i.e., area Q M G M F M Q’ M . This, in turn, shows that the cost saved exceeds the loss in revenue and, so, all the firms taken as a whole can increase their profit represented by the area E M F M G M . The prospect of earning this extra profit actually acts as the incentive to form a cartel in the oligopoly market structure.
Since the cartel is formed, all firms agree together to produce the total quantity OQ’ M . In order to carry this out, each and every firm is allotted a quota or a certain portion of production such that the sum of all quotas is equal to OQ M . For this, the best way of quota allotment would be to treat each firm as a separate entity (plant) under the same monopolist. Thus, all the firms have the same marginal cost (MC) such that MC = MR (marginal revenue).
Finally, the total profit is maximised because the total output is produced at the minimum cost.
Each and every firm can increase its profit by reducing the profits of other firms, simply by increasing its output quantity above the allotted quota. The system of cartel formation must guard against the desire of individual firms to violate the quota and the cartel breaks down when the cost of guarding against quota violation is very high.
The OPEC is an example of collusive oligopoly or cartel in which members (producers) explicitly agree to cooperate in setting prices and output levels. All the producers in an industry need not and often do not join the cartel. But if most producers adhere to the cartel’s agreements, and if market demand is sufficiently inelastic, the cartel may drive prices well above competitive levels.
Two conditions for success:
Two conditions must be fulfilled for cartel success. First, a stable cartel organisation must be formed whose members agree on price and production levels and both adhere to that agreement. The second condition is the potential for monopoly power. A cartel cannot raise price much if it faces a highly elastic demand curve. If the potential gains from cooperation are large, cartel members will have more incentive to share their organisational problems.
Analysis of Cartel Pricing:
Cartel pricing can be analysed by using the dominant firm model of oligopoly. It is because a cartel usually accounts for only a portion of total production and must take into account the supply response of competitive (non-cartel) producers when it sets price. Here we illustrate the OPEC oil cartel.
Fig. 7 illustrates the case of OPEC. Total demand TD is the world demand curve for crude oil, and S c is the competitive (non-OPEC) supply curve. The demand for OPEC oil D 0 is the difference between total demand (TD) and competitive supply (SC), and MR 0 is the corresponding marginal revenue curve.
MC 0 is OPEC’s marginal cost curve; OPEC has much lower production costs than do non-OPEC producers. OPECโs marginal revenue and marginal cost are equal at quantity Q 0 , which is the quantity that OPEC will produce. Here we see from OPEC s demand curve that the price will be P 0 .
Since both total demand and non-OPEC supply are inelastic, the demand for OPEC oil is also fairly inelastic; thus the cartel has substantial monopoly. In the 1970s, it used that power to drive prices well above competitive levels.
In this context, it is important to distinguish between short-run and long-run supply and demand curves. The total demand and non-OPEC supply curves in Fig. 7 apply to short-or intermediate-run analysis. In the long run, both demand and supply will be much more elastic, which means that OPEC’s demand curve will also be much more elastic.
We would thus expect that, in the long run, OPEC would be unable to maintain a price that is so much above the competitors’ level. In truth, during 1982-99, oil prices fell steadily, mainly because of the long- run adjustment of demand and non-OPEC supply.
However, cartel is not an unmixed blessing. No doubt cartel members can talk to one another in order to formalize an agreement. But it is not that easy to reach a consensus. Different members may have different costs, different assessments of market demand, and even different objectives, and they may, therefore, want to set prices at different levels.
Furthermore, each member of the cartel will be tempted to “cheat” by lowering its price slightly to capture a larger market share than it was allotted. Most often, only the threat of a long-term return to competitive prices deters cheating of this sort. But if the profits from cartelization are large enough, that threat may be sufficient.
Essay # 5. Sales (Revenue) Maximisation :
W.J. Baumol presented an alternative hypothesis to profit maximisation, viz., sales (revenue) maximisation. He has suggested that large oligopolistic firms do not maximise profit, but rather maximise sales revenue, subject to the constraint that profit equals or exceeds some minimum accepted level. Various empirical studies support Baumol’s hypothesis. And it accurately captures some aspects of oligopolistic firms’ behaviour.
Most important, when firms are uncertain about their demand curve they actually face, or, when they cannot accurately estimate the marginal costs of their output (due to uncertainty about factor prices, or when they produce more than one product), the decision to try to maximise sales appears to be consistent with their long-term survival. This is why many oligopolist firms seek to maximise their market share in order to protect themselves from the adverse effects of uncertain market environment.
Graphical Analysis :
A revenue-maximising oligopolist would choose to produce that level of output for which MR = 0. When MR = 0, TR is maximum. That is, the oligopolist should proceed to the point at which selling any extra unit(s) actually leads to a fall in TR. This choice is illustrated in Fig. 8.
For the firm which faces the demand curve D, TR is maximum when output is q s . For q < q s , MR is positive. This means that selling more units increases TR (though not necessarily profit). For q > q s , however, MR is negative. So further sales actually reduce TR because of price cuts that are necessary to induce consumers to buy more. We know that
MR = P(1 โ 1/e p ) โฆ (1)
MR = 0 if e p = 1, in which case TR will be maximum. TR is constant in a small neighbourhood of that output quantity at M 1 P = 0, TR is maximum, and when TR is maximum, e p = 1.
We may now compare the revenue-maximisation choice with the profit-maximising level of output, q s . At q p , MR equals marginal cost MC in Fig. 8. Increasing output beyond q p would reduce profits since MR < MC. Even though TR continues to increase up to q s , units of output beyond q p bring in less than they cost to produce. Since marginal revenue is positive at q p , equation (1) shows that demand must be elastic (e p > 1) at this point.
Essay # 6. Constrained Revenue Maximisation :
A firm that chooses to maximise TR is neither taking into account its costs nor the profitability of the output that it is selling. And it is quite possible that the output level q s in Fig. 8 yields negative profit to the firm. However, it is not possible to any firm to survive for ever with negative profits. So it may be more realistic to assume that firms do meet some minimum level (target rate) of profit from their activities.
Thus, even though oligopolists may be prompted to produce more than q p with a view to maximising revenue, they may produce less than q p units in order to ensure an acceptable level of profit. They will, therefore, behave as constrained revenue maximises and will choose to produce an output level which lies between q p and q s .
Mathematical Analysis :
How firms in Oligopoly compete
Oligopoly is a market structure in which a few firms dominate the industry; it is an industry with a five firm concentration ratio of greater than 50%.
In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave:
- Barriers to entry are likely to be a feature of Oligopoly
- There are different models to explain how firms may behave
The kinked demand curve model suggests firms will be profit maximisers.
Kinked Demand Curve Diagram
At p1 if firms increased their price, consumers would buy from the other firms. Therefore, they would lose a large share of the market and demand will be elastic. Therefore, firms will lose revenue by increasing the price.
If firms cut price then they would gain a big increase in market share. However, it is unlikely that firms will allow this. Therefore, other firms follow suit and cut-price as well. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall.
This model suggests price will be rigid because there is no incentive for firms to change the price
If prices are rigid and firms have little incentive to change prices they will concentrate on non-price competition . This occurs when firms seek to increase revenue and sales by various methods other than price.
For example, a firm could spend money on advertising to raise the profile of their product and try and increase brand loyalty, if successful this will increase market sales. Advertising is a big feature of many oligopolies such as soft drinks and cars. Alternatively, they could introduce loyalty cards or improve the quality of their after sales service. When buying a plane ticket price is not the only factor consumers look at, they may prefer airlines with more leg room, air miles e.t.c.
Non-price competition depends upon the nature of the product. For example, advertising is very important for soft drinks but less important for petrol.
However, in reality, this model doesnโt always occur. Often the objectives of firms are not to maximise profit. For example, they may wish to increase the size of their firm and maximise sales. If this is the case, they may be willing to take part in a price war, even if this does lead to lower profits. Price wars involve firms selling goods at very low prices to try and gain market share. For example, newspapers such as the Times and the Sun have recently been sold very cheaply. Price wars are more likely if:
- 1. Large firms are able to cross subsidise one market from profits elsewhere
- 2. In a recession, markets are more competitive as firms seek to retain customers
However, price wars may only be short-term
A firm may engage in predatory pricing ; this occurs when the incumbent firm seeks to force a new firm out of business by selling at a very low price so that it cannot remain profitable.
Using game theory
Game theory looks at different possible outcomes of oligopoly – depending on how firms react to different decisions.
If the firms in oligopoly seek to increase market share the most likely outcome is that they both set low prices and make a low profit (ยฃ3m each) However if the firms could come to some agreement either formal or tacit collusion – they could both agree to raise prices. This will require the firms to reduce output and stick to the more limited supply. If they set high prices, then they will both be able to make monopoly profits (ยฃ8m each)
However, when prices are high, there is a temptation to undercut your rival and benefit from both high market prices and high output. This enables higher profit – ยฃ10m, but if firms start to cheat – then rivals are likely to retaliate by cutting prices too.
Collusion is possible in oligopoly, but it depends on several factors. Collusion is more likely if
1. There are a small number of firms, who are well known to each other – this makes it easier to stick to output quotas 2. A dominant firm, who is able to have a lot of influence in setting the price. 3. Barriers to entry, this is important to stop other firms entering to take advantage of the high profits 4. Effective communication and monitoring of output and costs 5. Similar production costs and therefore will want to raise prices at the same rate 6. Effective punishment strategies for firms who cheat 7. No effective government legislation, e.g. collusion is illegal in the UK.
Conclusion:
There is no certainty in how firms will compete in Oligopoly; it depends upon the objectives of the firms, the contestability of the market and the nature of the product. Some oligopolies compete on price; others compete on the quality of the product.
Examples of Competition in oligopoly
Petrol is a homogenous product and so is likely to be quite stable in prices. Firms often move petrol prices in response to changes in the oil price. However, the introduction of the supermarket own brand petrol has changed the market. Tesco and Sainsbury’s are more willing to sell cheaper petrol to attract customers to shop at their supermarket.
Coffee market
This takeaway coffee at 99p is quite cheap – suggesting a competitive oligopoly. However, for many customers, the price of coffee is secondary to the quality and environment of the coffee shop. Traditional coffee shops like Costa and Starbucks use more non-price competition to attract customers – as much as offering cheap prices.
In fact, there is a danger selling cheap coffee – may indicate to consumers lower quality.
How firms compete in general
See more – How firms compete
- Pricing strategies
Oligopoly Notes & Questions (A-Level, IB)
Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory
Oligopoly Definition: An Oligopoly is a market structure where only a few sellers dominate the market.
Oligopoly Examples & Explanation: Because there are only a few firms (players) in an Oligopoly, they tend to be highly interdependent of one another – meaning they will take in account each others’ actions when trying to compete in the market. Another characteristic is these markets also exhibit high barriers to entry, such that new firms cannot easily enter into the market. This characteristic is shared with Monopolies (one firm dominating) and Duopolies (two-firms dominating), explaining how they can dominate the market with large amounts of market share. If we consider the oil & gas industry, they tend to be an Oligopoly in most countries (think Shell, BP, Exxon) due to the huge capital investment required for oil exploration/mining, making it difficult for new producers to enter into the market. When a large oil/gas producer sells their oil at a lower price to increase their sales volume, other producers are likely to lower their prices as well to protect their share of the market. As a result, Oligopolies tend to keep market prices stable and focus on non-price competition, so that firms can avoid a price war. However, the negative oil prices from the coronavirus pandemic is also caused by other factors, including a lack of storage capacity for oil producers forcing them to sell, and a global lack of demand for oil during the crisis. In general, oil producers in OPEC agree on an amount of output to maintain a relatively high price for oil, meaning higher profits for the industry.
Oligopoly Economics Notes with Diagrams
Oligopoly video explanation – econplusdal.
The left video explains oligopoly and the kinked-demand curve, the right looks at competition and cartels in the oligopoly market structure.
Oligopoly Multiple Choice Questions (A-Level)
Oligopoly essay questions (ib), receive news on our free economics classes, notes/questions updates, and more, oligopoly in the news, related a-level, ib economics resources.
Follow us on Facebook , TES and SlideShare for resource updates.
You may also like
Types of Business Objectives Notes & Questions (A-Level, IB Economics)
Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | […]
Fiscal Policy Notes & Questions (A-Level, IB)
Financial Markets Notes (A-Level, IB)
Related Exam Boards: GCE A-Level, IB (HL), Edexcel (A2), OCR, AQA, Eduqas, WJEC Looking for revision notes, past exam questions and teaching […]
Phillips Curve Notes & Questions (A-Level, IB Economics)
Leave a comment cancel reply.
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Learning Objectives
- Explain why and how oligopolies exist
- Contrast collusion and competition
- Interpret and analyze the prisonerโs dilemma diagram
- Evaluate the tradeoffs of imperfect competition
Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. Oligopolies are typically characterized by mutual interdependence where various decisions such as output, price, advertising, and so on, depend on the decisions of the other firm(s). Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time.
Why Do Oligopolies Exist?
A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly. For example, when a government grants a patent for an invention to one firm, it may create a monopoly. When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure, those three firms may become an oligopoly.
Similarly, a natural monopoly will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve. In such a setting, the market has room for only one firm, because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market.
Quantity demanded in the market may also be two or three times the quantity needed to produce at the minimum of the average cost curveโwhich means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products). Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that they would not be able to sell it at a profitable price. This combination of economies of scale and market demand creates the barrier to entry, which led to the Boeing-Airbus oligopoly for large passenger aircraft.
The product differentiation at the heart of monopolistic competition can also play a role in creating oligopoly. For example, firms may need to reach a certain minimum size before they are able to spend enough on advertising and marketing to create a recognizable brand name. The problem in competing with, say, Coca-Cola or Pepsi is not that producing fizzy drinks is technologically difficult, but rather that creating a brand name and marketing effort to equal Coke or Pepsi is an enormous task.
Collusion or Competition?
When oligopoly firms in a certain market decide what quantity to produce and what price to charge, they face a temptation to act as if they were a monopoly. By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide up the profit among themselves. When firms act together in this way to reduce output and keep prices high, it is called collusion . A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price is called a cartel . See the following Clear It Up feature for a more in-depth analysis of the difference between the two.
Collusion versus cartels: How can I tell which is which?
In the United States, as well as many other countries, it is illegal for firms to collude since collusion is anti-competitive behavior, which is a violation of antitrust law. Both the Antitrust Division of the Justice Department and the Federal Trade Commission have responsibilities for preventing collusion in the United States.
The problem of enforcement is finding hard evidence of collusion. Cartels are formal agreements to collude. Because cartel agreements provide evidence of collusion, they are rare in the United States. Instead, most collusion is tacit, where firms implicitly reach an understanding that competition is bad for profits.
The desire of businesses to avoid competing so that they can instead raise the prices that they charge and earn higher profits has been well understood by economists. Adam Smith wrote in Wealth of Nations in 1776: โPeople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.โ
Even when oligopolists recognize that they would benefit as a group by acting like a monopoly, each individual oligopoly faces a private temptation to produce just a slightly higher quantity and earn slightly higher profitโwhile still counting on the other oligopolists to hold down their production and keep prices high. If at least some oligopolists give in to this temptation and start producing more, then the market price will fall. Indeed, a small handful of oligopoly firms may end up competing so fiercely that they all end up earning zero economic profitsโas if they were perfect competitors.
The Prisonerโs Dilemma
Because of the complexity of oligopoly, which is the result of mutual interdependence among firms, there is no single, generally-accepted theory of how oligopolies behave, in the same way that we have theories for all the other market structures. Instead, economists use game theory , a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. Game theory has found widespread applications in the social sciences, as well as in business, law, and military strategy.
The prisonerโs dilemma is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly. The story behind the prisonerโs dilemma goes like this:
Two co-conspiratorial criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. Eventually, a police officer enters the room where Prisoner A is being held and says: โYou know what? Your partner in the other room is confessing. So your partner is going to get a light prison sentence of just one year, and because youโre remaining silent, the judge is going to stick you with eight years in prison. Why donโt you get smart? If you confess, too, weโll cut your jail time down to five years, and your partner will get five years, also.โ Over in the next room, another police officer is giving exactly the same speech to Prisoner B. What the police officers do not say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will end up with only two years in jail each.
The game theory situation facing the two prisoners is shown in Table 1 . To understand the dilemma, first consider the choices from Prisoner Aโs point of view. If A believes that B will confess, then A ought to confess, too, so as to not get stuck with the eight years in prison. But if A believes that B will not confess, then A will be tempted to act selfishly and confess, so as to serve only one year. The key point is that A has an incentive to confess regardless of what choice B makes! B faces the same set of choices, and thus will have an incentive to confess regardless of what choice A makes. Confess is considered the dominant strategy or the strategy an individual (or firm) will pursue regardless of the other individualโs (or firmโs) decision. The result is that if prisoners pursue their own self-interest, both are likely to confess, and end up doing a total of 10 years of jail time between them.
The game is called a dilemma because if the two prisoners had cooperated by both remaining silent, they would only have had to serve a total of four years of jail time between them. If the two prisoners can work out some way of cooperating so that neither one will confess, they will both be better off than if they each follow their own individual self-interest, which in this case leads straight into longer jail terms.
The Oligopoly Version of the Prisonerโs Dilemma
The members of an oligopoly can face a prisonerโs dilemma, also. If each of the oligopolists cooperates in holding down output, then high monopoly profits are possible. Each oligopolist, however, must worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. Table 2 ย shows the prisonerโs dilemma for a two-firm oligopolyโknown as a duopoly . If Firms A and B both agree to hold down output, they are acting together as a monopoly and will each earn $1,000 in profits. However, both firmsโ dominant strategy is to increase output, in which case each will earn $400 in profits.
Can the two firms trust each other? Consider the situation of Firm A:
- If A thinks that B will cheat on their agreement and increase output, then A will increase output, too, because for A the profit of $400 when both firms increase output (the bottom right-hand choice in Table 2 ) is better than a profit of only $200 if A keeps output low and B raises output (the upper right-hand choice in the table).
- If A thinks that B will cooperate by holding down output, then A may seize the opportunity to earn higher profits by raising output. After all, if B is going to hold down output, then A can earn $1,500 in profits by expanding output (the bottom left-hand choice in the table) compared with only $1,000 by holding down output as well (the upper left-hand choice in the table).
Thus, firm A will reason that it makes sense to expand output if B holds down output and that it also makes sense to expand output if B raises output. Again, B faces a parallel set of decisions.
The result of this prisonerโs dilemma is often that even though A and B could make the highest combined profits by cooperating in producing a lower level of output and acting like a monopolist, the two firms may well end up in a situation where they each increase output and earn only $400 each in profits . The following Clear It Up feature discusses one cartel scandal in particular.
What is the Lysine cartel?
Lysine, a $600 million-a-year industry, is an amino acid used by farmers as a feed additive to ensure the proper growth of swine and poultry. The primary U.S. producer of lysine is Archer Daniels Midland (ADM), but several other large European and Japanese firms are also in this market. For a time in the first half of the 1990s, the worldโs major lysine producers met together in hotel conference rooms and decided exactly how much each firm would sell and what it would charge. The U.S. Federal Bureau of Investigation (FBI), however, had learned of the cartel and placed wire taps on a number of their phone calls and meetings.
From FBI surveillance tapes, following is a comment that Terry Wilson, president of the corn processing division at ADM, made to the other lysine producers at a 1994 meeting in Mona, Hawaii:
I wanna go back and I wanna say something very simple. If weโre going to trust each other, okay, and if Iโm assured that Iโm gonna get 67,000 tons by the yearโs end, weโre gonna sell it at the prices we agreed to . . . The only thing we need to talk about there because we are gonna get manipulated by these [expletive] buyersโthey can be smarter than us if we let them be smarter. . . . They [the customers] are not your friend. They are not my friend. And we gotta have โem, but they are not my friends. You are my friend. I wanna be closer to you than I am to any customer. Cause you can make us โฆ money. โฆ And all I wanna tell you again is letโsโletโs put the prices on the board. Letโs all agree thatโs what weโre gonna do and then walk out of here and do it.
The price of lysine doubled while the cartel was in effect. Confronted by the FBI tapes, Archer Daniels Midland pled guilty in 1996 and paid a fine of $100 million. A number of top executives, both at ADM and other firms, later paid fines of up to $350,000 and were sentenced to 24โ30 months in prison.
In another one of the FBI recordings, the president of Archer Daniels Midland told an executive from another competing firm that ADM had a slogan that, in his words, had โpenetrated the whole company.โ The company president stated the slogan this way: โOur competitors are our friends. Our customers are the enemy.โ That slogan could stand as the motto of cartels everywhere.
How to Enforce Cooperation
How can parties who find themselves in a prisonerโs dilemma situation avoid the undesired outcome and cooperate with each other? The way out of a prisonerโs dilemma is to find a way to penalize those who do not cooperate.
Perhaps the easiest approach for colluding oligopolists, as you might imagine, would be to sign a contract with each other that they will hold output low and keep prices high. If a group of U.S. companies signed such a contract, however, it would be illegal. Certain international organizations, like the nations that are members of the Organization of Petroleum Exporting Countries (OPEC) , have signed international agreements to act like a monopoly, hold down output, and keep prices high so that all of the countries can make high profits from oil exports. Such agreements, however, because they fall in a gray area of international law, are not legally enforceable. If Nigeria, for example, decides to start cutting prices and selling more oil, Saudi Arabia cannot sue Nigeria in court and force it to stop.
Visit the Organization of the Petroleum Exporting Countries website and learn more about its history and how it defines itself.
Because oligopolists cannot sign a legally enforceable contract to act like a monopoly, the firms may instead keep close tabs on what other firms are producing and charging. Alternatively, oligopolists may choose to act in a way that generates pressure on each firm to stick to its agreed quantity of output.
One example of the pressure these firms can exert on one another is the kinked demand curve , in which competing oligopoly firms commit to match price cuts, but not price increases. This situation is shown in Figure 1 . Say that an oligopoly airline has agreed with the rest of a cartel to provide a quantity of 10,000 seats on the New York to Los Angeles route, at a price of $500. This choice defines the kink in the firmโs perceived demand curve. The reason that the firm faces a kink in its demand curve is because of how the other oligopolists react to changes in the firmโs price. If the oligopoly decides to produce more and cut its price, the other members of the cartel will immediately match any price cutsโand therefore, a lower price brings very little increase in quantity sold.
If one firm cuts its price to $300, it will be able to sell only 11,000 seats. However, if the airline seeks to raise prices, the other oligopolists will not raise their prices, and so the firm that raised prices will lose a considerable share of sales. For example, if the firm raises its price to $550, its sales drop to 5,000 seats sold. Thus, if oligopolists always match price cuts by other firms in the cartel, but do not match price increases, then none of the oligopolists will have a strong incentive to change prices, since the potential gains are minimal. This strategy can work like a silent form of cooperation, in which the cartel successfully manages to hold down output, increase price , and share a monopoly level of profits even without any legally enforceable agreement.
Figure 1. A Kinked Demand Curve. Consider a member firm in an oligopoly cartel that is supposed to produce a quantity of 10,000 and sell at a price of $500. The other members of the cartel can encourage this firm to honor its commitments by acting so that the firm faces a kinked demand curve. If the oligopolist attempts to expand output and reduce price slightly, other firms also cut prices immediatelyโso if the firm expands output to 11,000, the price per unit falls dramatically, to $300. On the other side, if the oligopoly attempts to raise its price, other firms will not do so, so if the firm raises its price to $550, its sales decline sharply to 5,000. Thus, the members of a cartel can discipline each other to stick to the pre-agreed levels of quantity and price through a strategy of matching all price cuts but not matching any price increases.
Many real-world oligopolies, prodded by economic changes, legal and political pressures, and the egos of their top executives, go through episodes of cooperation and competition. If oligopolies could sustain cooperation with each other on output and pricing, they could earn profits as if they were a single monopoly. However, each firm in an oligopoly has an incentive to produce more and grab a bigger share of the overall market; when firms start behaving in this way, the market outcome in terms of prices and quantity can be similar to that of a highly competitive market.
Tradeoffs of Imperfect Competition
Monopolistic competition is probably the single most common market structure in the U.S. economy. It provides powerful incentives for innovation, as firms seek to earn profits in the short run, while entry assures that firms do not earn economic profits in the long run. However, monopolistically competitive firms do not produce at the lowest point on their average cost curves. In addition, the endless search to impress consumers through product differentiation may lead to excessive social expenses on advertising and marketing.
Oligopoly is probably the second most common market structure. When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost, they may provide considerable benefit to consumers. Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. Oligopolists also do not typically produce at the minimum of their average cost curves. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.
The task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers. Monopoly and Antitrust Policy discusses the delicate judgments that go into this task.
The Temptation to Defy the Law
Oligopolistic firms have been called โcats in a bag,โ as this chapter mentioned. The French detergent makers chose to โcozy upโ with each other. The result? An uneasy and tenuous relationship. When the Wall Street Journal reported on the matter, it wrote: โAccording to a statement a Henkel manager made to the [French anti-trust] commission, the detergent makers wanted โto limit the intensity of the competition between them and clean up the market.โ Nevertheless, by the early 1990s, a price war had broken out among them.โ During the soap executivesโ meetings, which sometimes lasted more than four hours, complex pricing structures were established. โOne [soap] executive recalled โchaoticโ meetings as each side tried to work out how the other had bent the rules.โ Like many cartels, the soap cartel disintegrated due to the very strong temptation for each member to maximize its own individual profits.
How did this soap opera end? After an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel, and Proctor & Gamble a total of โฌ361 million ($484 million). A similar fate befell the icemakers. Bagged ice is a commodity, a perfect substitute, generally sold in 7- or 22-pound bags. No one cares what label is on the bag. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model. After the agreements, each firm was the sole supplier of bagged ice to a region; there were profits in both the long run and the short run. According to the courts: โThese companies illegally conspired to manipulate the marketplace.โ Fines totaled about $600,000โa steep fine considering a bag of ice sells for under $3 in most parts of the United States.
Even though it is illegal in many parts of the world for firms to set prices and carve up a market, the temptation to earn higher profits makes it extremely tempting to defy the law.
An oligopoly is a situation where a few firms sell most or all of the goods in a market. Oligopolists earn their highest profits if they can band together as a cartel and act like a monopolist by reducing output and raising price. Since each member of the oligopoly can benefit individually from expanding output, such collusion often breaks downโespecially since explicit collusion is illegal.
The prisonerโs dilemma is an example of game theory. It shows how, in certain situations, all sides can benefit from cooperative behavior rather than self-interested behavior. However, the challenge for the parties is to find ways to encourage cooperative behavior.
The United States Department of Justice. โAntitrust Division.โ Accessed October 17, 2013. http://www.justice.gov/atr/.
eMarketer.com. 2014. โTotal US Ad Spending to See Largest Increase Since 2004: Mobile advertising leads growth; will surpass radio, magazines and newspapers this year. Accessed March 12, 2015. http://www.emarketer.com/Article/Total-US-Ad-Spending-See-Largest-Increase-Since-2004/1010982.
Federal Trade Commission. โAbout the Federal Trade Commission.โ Accessed October 17, 2013. http://www.ftc.gov/ftc/about.shtm.
when a few large firms have all or most of the sales in an industry
economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition
the total number of units of a good or service consumers are willing to purchase at a given price
when firms act together to reduce output and keep prices high
a group of firms that collude to produce the monopoly output and sell at the monopoly price
a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make
a game in which the gains from cooperation are larger than the rewards from pursuing self-interest
an oligopoly with only two firms
a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
Oligopoly Copyright © 2020 by Rice University; Dean, Elardo, Green, Wilson, Berger. All Rights Reserved.
Share This Book
Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.
10 Oligopoly
10.1 theory of the oligopoly, why do oligopolies exist.
Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. We typically characterize oligopolies by mutual interdependence where various decisions such as output, price, and advertising depend on other firm(s)’ decisions. Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time.
A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly. For example, when a government grants a patent for an invention to one firm, it may create a monopoly. When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure, those three firms may become an oligopoly.
Similarly, a natural monopoly will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve. In such a setting, the market has room for only one firm, because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market.
Quantity demanded in the market may also be two or three times the quantity needed to produce at the minimum of the average cost curveโwhich means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products). Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that they would not be able to sell it at a profitable price. This combination of economies of scale and market demand creates the barrier to entry, which led to the Boeing-Airbus oligopoly (also called a duopoly) for large passenger aircraft.
The product differentiation at the heart of monopolistic competition can also play a role in creating oligopoly. For example, firms may need to reach a certain minimum size before they are able to spend enough on advertising and marketing to create a recognizable brand name. The problem in competing with, say, Coca-Cola or Pepsi is not that producing fizzy drinks is technologically difficult, but rather that creating a brand name and marketing effort to equal Coke or Pepsi is an enormous task.
The existence of oligopolies can lead to the combination of many firms into larger firms. This is discussed next.
Types of Firm Integration
Conglomerate.
From: Wikipedia: Conglomerate (company)
Aย conglomerate ย is a combination of multipleย business entities ย operating in entirely different industries under oneย corporate group , usually involving aย parent company ย and manyย subsidiaries . Often, a conglomerate is aย multi-industry company . Conglomerates are often large andย multinational .
Horizontal Integration
From: Wikipedia: Horizontal integration
Horizontal integration ย is the process of aย company ย increasingย production ย of goods or services at the same part of theย supply chain . A company may do this via internal expansion,ย acquisition or merger . [1] [2] [3]
The process can lead toย monopoly ย if a company captures the vast majority of the market for that product or service. [3]
Horizontal integration contrasts withย vertical integration , where companies integrate multiple stages of production of a small number of production units.
Benefits of horizontal integration to both the firm and society may includeย economies of scale ย andย economies of scope . For the firm, horizontal integration may provide a strengthened presence in the reference market. It may also allow the horizontally integrated firm to engage inย monopoly pricing , which is disadvantageous to society as a whole and which may cause regulators to ban or constrain horizontal integration. [5]
An example of horizontal integration in the food industry was theย Heinz ย andย Kraft Foods ย merger. On March 25, 2015, Heinz and Kraft merged into one company, the deal valued at $46 Billion. [8] [9] ย Both produce processed food for the consumer market.
On November 16, 2015,ย Marriott International ย announced that it would purchaseย Starwood Hotels ย for $13.6 billion, creating the world’s largest hotel chain once the deal closed. [11] ย The merger was finalized on September 23, 2016. [12]
AB-Inbev acquisition of SAB Miller for $107 Billion which completed in 2016, is one of the biggest deals of all time. [13]
Vertical Integration
From: Wikipedia: Vertical integration
Inย microeconomics ย andย management ,ย vertical integration ย is an arrangement in which theย supply chain ย of a company is owned by that company. Usually each member of the supply chain produces a differentย product ย or (market-specific) service, and the products combine to satisfy a common need. It is contrasted withย horizontal integration , wherein a company produces several items which are related to one another. Vertical integration has also describedย management styles ย that bring large portions of the supply chain not only under a common ownership, but also into oneย corporation ย (as in the 1920s when theย Ford River Rouge Complex ย began making much of its own steel rather than buying it from suppliers).
Vertical integration and expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. Vertical integration and expansion can become undesirable when its actions become anti-competitive and impede free competition in an open marketplace. Vertical integration is one method of avoiding theย hold-up problem . A monopoly produced through vertical integration is called aย vertical monopoly .
Vertical integration is often closely associated to vertical expansion which, inย economics , is the growth of a business enterprise through theย acquisition ย of companies that produce the intermediate goods needed by the business or help market and distribute its product. Such expansion is desired because it secures the supplies needed by theย firm ย to produce its product and the market needed to sell the product. Such expansion can become undesirable when its actions becomeย anti-competitive ย and impede free competition in an open marketplace.
The result is a more efficient business with lower costs and more profits. On the undesirable side, when vertical expansion leads towardย monopolistic ย control of a product or service then regulative action may be required to rectify anti-competitive behavior. Related to vertical expansion isย lateral expansion , which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achievingย economies of scale .
Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase scales and to gain market power. The acquisition ofย DirecTV ย byย News Corporation ย is an example of forward vertical expansion or acquisition. DirecTV is aย satellite TV ย company through which News Corporation can distribute more of its media content: news, movies and television shows. The acquisition ofย NBC ย byย Comcast ย is an example of backward vertical integration. For example, in the United States, protecting the public from communications monopolies that can be built in this way is one of the missions of theย Federal Communications Commission .
One of the earliest, largest and most famous examples of vertical integration was theย Carnegie Steel ย company. The company controlled not only the mills where theย steel ย was made, but also the mines where theย iron ore ย was extracted, the coal mines that supplied theย coal , the ships that transported the iron ore and the railroads that transported the coal to the factory, theย coke ย ovens where the coal was cooked, etc. The company focused heavily on developing talent internally from the bottom up, rather than importing it from other companies. Later, Carnegie establishedย an institute ย of higher learning to teach the steel processes to the next generation.
Oil companies , both multinational (such asย ExxonMobil ,ย Royal Dutch Shell ,ย ConocoPhillips ย orย BP ) and national (e.g.,ย Petronas ) often adopt a vertically integrated structure, meaning that they are active along the entire supply chain fromย locating deposits , drilling and extractingย crude oil , transporting it around the world,ย refining ย it into petroleum products such asย petrol/gasoline , to distributing the fuel to company-owned retail stations, for sale to consumers.
Lateral Integration
Lateral expansion , inย economics , is the growth of a business enterprise through the acquisition of similar companies, in the hope of achievingย economies of scale ย orย economies of scope . Unchecked lateral expansion can lead to powerfulย conglomerates ย orย monopolies .
Lateral integration differs from horizontal integration as the integration is not exact. For example, one of the examples of horizontal integration was one hotel chain buying another. This did not enhance the company’s product offerings other than having more hotel options.
On the other hand, Parker Hannifin acquired Lord Corporation. While the two companies make similar types of products, their product offerings were distinct. There was not much overlap with the types of products offered. Instead, Parker Hannifin was not able to provide a far greater product offering in the given sectors.
The Strength of an Oligopoly
From: Wikipedia: Concentration ratio
The most common concentration ratios are the CR 4 ย and the CR 8 , which means the market share of the four and the eight largest firms. Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to illustrate the degree to which an industry isย oligopolistic . [1]
N-firm concentration ratio is a common measure of market structure and shows the combined market share of the N largest firms in the market. For example, the 5-firm concentration ratio in the UK pesticide industry is 0.75, which indicates that the combined market share of the five largest pesticide sellers in the UK is about 75%. N-firm concentration ratio does not reflect changes in the size of the largest firms.
Concentration ratios range from 0 to 100 percent. The levels reach fromย no, low ย orย medium ย toย high ย to “total” concentration
Perfect competition
If there areย N ย firms in an industry and we are looking at the topย n ย of them, equal market share for all of them means that CR n ย =ย n/N . All other possible values will be greater than this.
No concentration
If CR n ย is close to 0%, (which is only possible for quite a large number of firms in the industryย N ) this meansย perfect competition ย or at the very leastย monopolistic competition . If for example CR 4 =0ย %, the four largest firm in the industry would not have any significant market share.
Low concentration
0% to 40%. [5] ย This category ranges from perfect competition to an oligopoly.
Medium concentration
40% to 70%. [5] ย An industry in this range is likely an oligopoly.
High concentration
70% to 100%. [5] ย This category ranges from an oligopoly to monopoly.
Total concentration
100% means an extremely concentratedย oligopoly . If for example CR 1 = 100%, there is aย monopoly .
10.2 Game theory
Game theory basics, dominant versus non-dominant strategies.
From: Wikipedia: Cooperative game theory
In game theory , a cooperative game (or coalitional game ) is a game with competition between groups of players (“coalitions”) due to the possibility of external enforcement of cooperative behavior (e.g. through contract law ). Those are opposed to non-cooperative games in which there is either no possibility to forge alliances or all agreements need to be self-enforcing (e.g. through credible threats ). [1]
Cooperative games are often analysed through the framework of cooperative game theory, which focuses on predicting which coalitions will form, the joint actions that groups take and the resulting collective payoffs. It is opposed to the traditional non-cooperative game theory which focuses on predicting individual players’ actions and payoffs and analyzing Nash equilibria . [2] [3]
Cooperative game theory provides a high-level approach as it only describes the structure, strategies and payoffs of coalitions, whereas non-cooperative game theory also looks at how bargaining procedures will affect the distribution of payoffs within each coalition. As non-cooperative game theory is more general, cooperative games can be analyzed through the approach of non-cooperative game theory (the converse does not hold) provided that sufficient assumptions are made to encompass all the possible strategies available to players due to the possibility of external enforcement of cooperation. While it would thus be possible to have all games expressed under a non-cooperative framework, in many instances insufficient information is available to accurately model the formal procedures available to the players during the strategic bargaining process, or the resulting model would be of too high complexity to offer a practical tool in the real world. In such cases, cooperative game theory provides a simplified approach that allows the analysis of the game at large without having to make any assumption about bargaining powers.
Types of Strategies
General strategy.
This is simply any rule that a player uses. These strategies can be “good” or “bad.” For example, if you have to choose heads or tails for a coinflip, you may use the strategy “tails never fails” and always pick tails even though there is no advantage to this strategy. Additionally, when playing the game of Blackjack, you may have a rule that you always hit when you have a score of 20. If you do not know how to play Blackjack, I will simply state that this is generally a very, very bad idea! Even though it is a poor strategy, it is still a strategy nonetheless.
Dominant Strategy
From: Wikipedia: Strategic dominance
In game theory , strategic dominance (commonly called simply dominance ) occurs when one strategy is better than another strategy for one player, no matter how that player’s opponents may play. Many simple games can be solved using dominance.
Nash Equilibrium
From: Wikipedia: Nash equilibrium
In terms of game theory, if each player has chosen a strategy, and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and their corresponding payoffs constitutes a Nash equilibrium.
Stated simply, Alice and Bob are in Nash equilibrium if Alice is making the best decision she can, taking into account Bob’s decision while his decision remains unchanged, and Bob is making the best decision he can, taking into account Alice’s decision while her decision remains unchanged. Likewise, a group of players are in Nash equilibrium if each one is making the best decision possible, taking into account the decisions of the others in the game as long as the other parties’ decisions remain unchanged.
Informally, a strategy profile is a Nash equilibrium if no player can do better by unilaterally changing his or her strategy. To see what this means, imagine that each player is told the strategies of the others. Suppose then that each player asks themselves: “Knowing the strategies of the other players, and treating the strategies of the other players as set in stone, can I benefit by changing my strategy?”
If any player could answer “Yes”, then that set of strategies is not a Nash equilibrium. But if every player prefers not to switch (or is indifferent between switching and not) then the strategy profile is a Nash equilibrium. Thus, each strategy in a Nash equilibrium is a best response to all other strategies in that equilibrium. [13]
The Nash equilibrium may sometimes appear non-rational in a third-person perspective. This is because a Nash equilibrium is not necessarily Pareto optimal . [Note: We do not talk about Pareto optimality in this class, but you can think of it as a best-case for everyone situation.]
The Prisoner’s Dilemma
From: Wikipedia: Prisoner’s dilemma
The prisoner’s dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so. It was originally framed by Merrill Flood and Melvin Dresher while working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence rewards and named it “prisoner’s dilemma”, [1] presenting it as follows:
Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge, but they have enough to convict both on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is: If A and B each betray the other, each of them serves two years in prison If A betrays B but B remains silent, A will be set free and B will serve three years in prison (and vice versa) If A and B both remain silent, both of them will serve only one year in prison (on the lesser charge).
It is implied that the prisoners will have no opportunity to reward or punish their partner other than the prison sentences they get and that their decision will not affect their reputation in the future. Because betraying a partner offers a greater reward than cooperating with them, all purely rational self-interested prisoners will betray the other, meaning the only possible outcome for two purely rational prisoners is for them to betray each other. [2] The interesting part of this result is that pursuing individual reward logically leads both of the prisoners to betray when they would get a better individual reward if they both kept silent. In reality, humans display a systemic bias towards cooperative behavior in this and similar games despite what is predicted by simple models of “rational” self-interested action. [3] [4] [5] [6] This bias towards cooperation has been known since the test was first conducted at RAND; the secretaries involved trusted each other and worked together for the best common outcome. [7]
The prisoner’s dilemma game can be used as a model for many real world situations involving cooperative behavior. In casual usage, the label “prisoner’s dilemma” may be applied to situations not strictly matching the formal criteria of the classic or iterative games: for instance, those in which two entities could gain important benefits from cooperating or suffer from the failure to do so, but find it difficult or expensiveโnot necessarily impossibleโto coordinate their activities.
Game Tables
In the game above, we need some way to display all of the information in a condensed format. To accomplish this, we use a game table. For the sake of displaying the game tables in an accessible manner, I will use the following format:
You will see that the information is exactly the same as the information presented. For example, if A stays silent, but B betrays, we would be in the top, right payout cell (which is -3,0).
The next question is what the “best” outcome is. We will examine that but going back to the two strategies discussed earlier.
Solving Prisoner’s Dilemma with Dominant Strategy
The iterated elimination (or deletion) of dominated strategies (also denominated as IESDS or IDSDS) is one common technique for solving games that involves iteratively removing dominated strategies. In the first step, at most one dominated strategy is removed from the strategy space of each of the players since no rational player would ever play these strategies. This results in a new, smaller game. Some strategiesโthat were not dominated beforeโmay be dominated in the smaller game. The first step is repeated, creating a new even smaller game, and so on. The process stops when no dominated strategy is found for any player. This process is valid since it is assumed that rationality among players is common knowledge , that is, each player knows that the rest of the players are rational, and each player knows that the rest of the players know that he knows that the rest of the players are rational, and so on ad infinitum (see Aumann, 1976).
There are two versions of this process. One version involves only eliminating strictly dominated strategies. If, after completing this process, there is only one strategy for each player remaining, that strategy set is the unique Nash equilibrium [2] . This will be discussed next.
You can use the following set of steps:
- Pick one person (it doesnโt matter).
- If their opponent picks choice A, what will your person pick?
- If their opponent picks choice B, what will your person pick?
- If you choose the same thing for both of your opponentโs choices, then that is the dominant strategy. We say that choice strictly dominates the other choice and you can cross off the strictly dominated strategy.
- Repeat for the opponent (this should be easier).
- If the choices are different, there is no dominant strategy
Let us return to the prisoner’s dilemma game table. Let us act as player A and decide what player A would do in a variety of situations.
If player B stays silent, what should we do as player A? If we stay silent, then we would lose 1 (meaning one year in prison.) If we betray, we earn 0. In this case we should betray as no prison is better than one year in prison.
If player B betrays, what should we do as player A? If we stay silent, then we get three years in prison. If we betray, we get two years in prison. In this case, we should betray as two years in prison is better than 3 years in prison.
Therefore, the dominant strategy for player A is to betray. This is because regardless of what player B chooses to do, player A’s best choice is to betray. We can therefore eliminate “A-stay silent” since player A will not stay silent.
We can now move to player B to see if there is a dominant strategy for player B. It should be noted that, in theory, there does not need to be, but with our games there will be (if player A has one.) So, now let us play our modified game as player B.
If player A chooses to stay silent – STOP! – what did we just discuss? Player A will not choose to stay silent, so we do not need to worry about this. So, if player A chooses to betray, what should we do as player B? If we stay silent, we get three years in prison whereas we only get two years in prison if we betray. Therefore, player B should betray.
Thus, the dominant strategy for this game is (A,B)=(Betray,Betray).
There are additional exercises in the companion. Each player can have either 0 or 1 dominant strategies.
Solving Prisoner’s Dilemma with Nash Equilibrium
As mentioned earlier, we are looking for a stable solution. That is, a situation where neither player has an incentive to change their choice based on the other player’s choice. To find the Nash Equilibrium, you can follow these steps:
- Choose a player (again, it doesnโt matter which).
- Pick a choice (it doesnโt matter which).
- Based on your choice, what will the opponent pick?
- Based on what your opponent picks, what would you pick?
- If it is the same as your original choice, it is a Nash Equilibrium. If not, it is not a Nash Equilibrium.
- Repeat for the other choice(s).
So, let us return to our game. Without loss of generality, let us play as player A. It should be noted that playing as player B will yield the same exact results.
As player A, let us begin by staying silent. What will player B do? Player B can either stay silent (one year in prison) or betray (0 years in prison.) Player B will betray. Now, since we know that player B will betray, what should player A do? If player A stays silent, we get 3 years in prison but if we betray we only get two years in prison. Thus, we, as player A, should betray. But this is different from where we started, thus we do not have a Nash Equilibrium. The chain for this event is:
A: Silent >> B: Betray >> A: Betray — A has changed their choice, not a Nash Equilibrium.
Now, as player A, let us start by betraying. If we betray, player B can either stay silent (3 years in prison) or betray (2 years in prison.) Thus, player B will betray. When player B betrays, what should we do? We can either stay silent (3 years in prison) or betray (2 years in prison.) Thus, we betray. This is exactly where we started, thus, we have a Nash Equilibrium. In fact, we could continue to do this forever and the chain would stay exactly the same. The chain for this scenario is:
A: Betray >> B: Betray >> A: Betray — A has kept their choice the same, so A:Betray, B:Betray is a Nash Equilibrium.
10.3 Cartels and Collusion
Game theory and oligopolies.
So what was the foray into game theory for? It allows us to explore how individual firms in oligopolies want to act. Let us consider two firms that each produce widgets. They can each choose to either produce at a high price level or low price level. Remember, for a firm to produce more (and sell it) they have to charge less. And if a firm restricts its output, they can charge more. Recall, a monopolist is able to make an additional profit because it restricts output and charges more whereas a firm in a perfectly competitive market may sell more, but at a lower price, and therefore earns a lower profit.
Let us use the following game table showing each firms’ profits:
First, let us step back and just look at the game table. What should each firm do? It seems like each firm should just set their price high. But, is that what will happen?
Let us look for the dominant strategy. As player A, if player B chooses to set a high price, we should should charge a low price (70>65). If player B chooses to set a low price, we should choose low price (40>20). Therefore, as player A, we should always choose to set our price low. The same applies for player B as setting their price low is always better than setting their price high regardless of what player A does (100>90 and 60>40).
So, even though it “makes sense” for both firms to set their prices high, both firms will set their prices low. The same would apply to the Nash Equilibrium.
What does this mean in the real world? If the two firms could cooperate and fully trust each other, they would each set their prices high. This is what we call collusion and will be discussed shortly. But, whether it is due to laws or just human nature, firms are never able to collude too long. Eventually, firms will move to the dominant strategy. While firms would like to keep their prices high, there are typically forces that prevent this.
From: Wikipedia: OPEC
The Organization of the Petroleum Exporting Countries ( OPEC , / ห oส p ษ k / OH-pek ) is an intergovernmental organization of 14 nations, founded in 1960 in Baghdad by the first five members ( Iran , Iraq , Kuwait , Saudi Arabia , and Venezuela ), and headquartered since 1965 in Vienna, Austria . As of September 2018, the then 14 member countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world’s “proven” oil reserves , giving OPEC a major influence on global oil prices that were previously determined by the so called “ Seven Sisters โ grouping of multinational oil companies.
The stated mission of the organization is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” [4] The organization is also a significant provider of information about the international oil market. The current OPEC members are the following: Algeria , Angola , Ecuador , Equatorial Guinea , Gabon , Iran , Iraq , Kuwait , Libya , Nigeria , the Republic of the Congo , Saudi Arabia (the de facto leader), United Arab Emirates , and Venezuela . Indonesia and Qatar are former members.
The formation of OPEC marked a turning point toward national sovereignty over natural resources , and OPEC decisions have come to play a prominent role in the global oil market and international relations . The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and in the revenue and wealth of OPEC, with long-lasting and far-reaching consequences for the global economy . In the 1980s, OPEC began setting production targets for its member nations; generally, when the targets are reduced, oil prices increase. This has occurred most recently from the organization’s 2008 and 2016 decisions to trim oversupply.
Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition , but one whose consultations are protected by the doctrine of state immunity under international law . In December 2014, “OPEC and the oil men” ranked as #3 on Lloyd’s list of “the top 100 most influential people in the shipping industry”. [5] However, the influence of OPEC on international trade is periodically challenged by the expansion of non-OPEC energy sources, and by the recurring temptation for individual OPEC countries to exceed production targets and pursue conflicting self-interests.
At various times, OPEC members have displayed apparent anti-competitive cartel behavior through the organization’s agreements about oil production and price levels. [26] In fact, economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, as in this definition from OECD ‘s Glossary of Industrial Organisation Economics and Competition Law : [1]
International commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC: Organization of Petroleum Exporting Countries) are examples of international cartels which have publicly entailed agreements between different national governments.
OPEC members strongly prefer to describe their organization as a modest force for market stabilization, rather than a powerful anti-competitive cartel. In its defense, the organization was founded as a counterweight against the previous “ Seven Sisters ” cartel of multinational oil companies, and non-OPEC energy suppliers have maintained enough market share for a substantial degree of worldwide competition. [27] Moreover, because of an economic “ prisoner’s dilemma ” that encourages each member nation individually to discount its price and exceed its production quota, [28] widespread cheating within OPEC often erodes its ability to influence global oil prices through collective action . [29] [30]
OPEC has not been involved in any disputes related to the competition rules of the World Trade Organization , even though the objectives, actions, and principles of the two organizations diverge considerably. [31] A key US District Court decision held that OPEC consultations are protected as “governmental” acts of state by the Foreign Sovereign Immunities Act , and are therefore beyond the legal reach of US competition law governing “commercial” acts. [32] [33] Despite popular sentiment against OPEC, legislative proposals to limit the organization’s sovereign immunity, such as the NOPEC Act, have so far been unsuccessful. [34]
Cartel Theory
From: Wikipedia: Cartel
A cartel is a group of apparently independent producers whose goal is to increase their collective profits by means of price fixing , limiting supply, or other restrictive practices . Cartels typically control selling prices, but some are organized to force down the prices of purchased inputs. Antitrust laws attempt to deter or forbid cartels. A single entity that holds a monopoly by this definition cannot be a cartel, though it may be guilty of abusing said monopoly in other ways. Cartels usually arise in oligopolies โindustries with a small number of sellersโand usually involve homogeneous products .
A survey of hundreds of published economic studies and legal decisions of antitrust authorities found that the median price increase achieved by cartels in the last 200 years is about 23 percent. [4] Private international cartels (those with participants from two or more nations) had an average price increase of 28 percent, whereas domestic cartels averaged 18 percent. Less than 10 percent of all cartels in the sample failed to raise market prices.
In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the agreed price or selling more than the production quotas set by the cartel (see also game theory ). This has caused many cartels that attempt to set product prices to be unsuccessful in the long term . Empirical studies of 20th-century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years [5] . However, once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Publicly known cartels that do not follow this cycle include, by some accounts, the Organization of the Petroleum Exporting Countries (OPEC).
Price fixing is often practiced internationally. When the agreement to control price is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated [6] . Examples of such price fixing include oil, whose price is partly controlled by the supply by OPEC countries, and international airline tickets, which have prices fixed by agreement with the IATA , a practice for which there is a specific exception in antitrust law.
Prior to World War II (except in the United States), members of cartels could sign contracts that were enforceable in courts of law. There were even instances where cartels are encouraged by states. For example, during the period before 1945, cartels were tolerated in Europe and were promoted as a business practice in German-speaking countries. [7] This was the norm due to the accepted benefits, which even the U.S. Supreme court has noted. In the case, the U.S. v. National Lead Co. et al. , it cited the testimony of individuals, who cited that a cartel, in its protean form, is “a combination of producers for the purpose of regulating production and, frequently, prices, and an association by agreement of companies or sections of companies having common interests so as to prevent extreme or unfair competition.” [8]
Today, however, price fixing by private entities is illegal under the antitrust laws of more than 140 countries. Examples of prosecuted international cartels are lysine , citric acid , graphite electrodes , and bulk vitamins . [9] This is highlighted in countries with market economies wherein price-fixing and the concept of cartels are considered inimical to free and fair competition, which is considered the backbone of political democracy. [10] The current condition makes it increasingly difficult for cartels to maintain sustainable operations. Even if international cartels might be out of reach for the regulatory authorities, they will still have to contend with the fact that their activities in domestic markets will be affected. [11]
For a cartel to be successful, some or all of the following conditions are necessary:
- A small number of firms.
- Products are relatively undifferentiated from one firm to the next.
- Prices are easily observable.
- Prices show little variation over time.
Introduction to Microeconomics Copyright © 2019 by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License , except where otherwise noted.
Share This Book
- Search Search Please fill out this field.
What Is an Oligopoly?
Understanding oligopolies, special considerations.
- Characteristics
- Game Theory
- Pros and Cons
The Bottom Line
- Government & Policy
Oligopoly: Meaning and Characteristics in a Market
An oligopoly is a type of market structure that exists within an economy. In an oligopoly, there is a small number of firms that control the market. A key characteristic of an oligopoly is that none of these firms can keep the other(s) from having significant influence over the market. The concentration ratio measures the market share of the largest firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others. An oligopoly is different from a monopoly, which is a market with only one producer.
Key Takeaways
- An oligopoly is a market structure wherein a small number of producers work to restrict output and/or fix prices so they can achieve above-normal market returns.
- Economic, legal, and technological factors can contribute to the formation and maintenance, or dissolution, of oligopolies.
- The major difficulty that oligopolies face is the prisoner's dilemma that each member faces, which encourages each member to cheat.
- Government policy can discourage or encourage oligopolistic behavior, and firms in mixed economies often seek government blessing for ways to limit competition.
Investopedia / Ellen Lindner
Market structures come in different forms and sizes. The term is used to describe the distinctions between industries, which are made up of different companies that sell their products and services. Most market structures aim for perfect competition , which is a theoretical construct that doesn't actually exist, As such, there are other structures that
These market structures are made up of a small number of companies within an industry that controls the market. Firms in an oligopoly set prices , whether collectivelyโin a cartel โor under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market.
Some of the barriers to entry (that prevent new players from entering the market) in an oligopoly include economies of scale , regulatory barriers, accessing supply and distribution channels, capital requirements, and brand loyalty.
Oligopolies in history include steel manufacturers, oil companies, railroads, tire manufacturing, grocery store chains, and wireless carriers. The economic and legal concern is that an oligopoly can block new entrants, slow innovation, and increase prices, all of which harmย consumers.
Governments sometimes respond to oligopolies with laws against price- fixing and collusion. Yet, a cartel can price fix if they operate beyond the reach or with the blessing of governments. Oligopolies that exist in mixed economies often seek out and lobby for favorable government policy to operate under the regulation or even direct supervision of government agencies.
The main problem that firms in an oligopoly face is that each firm has an incentive to cheat. if all firms in the oligopoly agree to jointly restrict supply and keep prices high, then each firm stands to capture substantial business from the others by breaking the agreement and undercutting the others. Such competition can be waged through prices, or through simply the individual company expanding its own output brought to market.ย
Companies in an oligopoly benefit from price-fixing, setting prices collectively, or under the direction of one firm in the bunch, rather than relying on free-market forces to do so.
Oligopoly Characteristics
Oligopolies are considered stable. One of the main reasons why they are is because participating firms need to see the benefits of collaboration over the costs of economic competition, then agree to not compete and instead agree on the benefits of cooperation.
The firms sometimes find creative ways to avoid the appearance of price-fixing , such as using phases of the moon. Price-fixing is the act of setting prices, rather than letting them be determined by the free-market forces. Another approach is for firms to follow a recognized price leader so that when the leader raises prices, the others will follow .
The conditions that enable oligopolies to exist include high entry costs in capital expenditures , legal privilege (license to use wireless spectrum or land for railroads), and a platform that gains value with more customers, such as social media.
The global tech and trade transformation has changed some of these conditions. For instance, offshore production and the rise of mini-mills have affected the steel industry. In the office software application space, Microsoft ( MSFT ) was targeted by Google Docs, which Google funded using cash from its web search business.
Oligopolies and Game Theory
Game theorists have developed models for these scenarios, which form a sort of prisoner's dilemma . When costs and benefits are balanced so that no firm wants to break from the group, it is considered the Nash equilibrium state for oligopolies. This can be achieved by contractual or market conditions, legal restrictions, or strategic relationships between members of the oligopoly that enable the punishment of cheaters.
Maintaining an oligopoly and coordinating action among buyers and sellers in general on the market involves shaping the payoffs to various prisoner's dilemmas and related coordination games that repeat over time.
As a result, many of the same institutional factors that facilitate the development of market economies by reducing prisoner's dilemma problems among market participants, such as secure enforcement of contracts, cultural conditions of high trust and reciprocity, and laissez-faire economic policy, might also potentially help encourage and sustain oligopolies.
Advantages and Disadvantages of an Oligopoly
One of the main benefits of having an oligopoly is that competition is very limited. That's because there are very few players in the market. Since there are few competitors, an oligopoly allows those who participate to net a higher amount of profits .
Customer demand is often greater in this type of market structure. This is commonly due to the fact that there are better products and services that are on the market. As such, firms don't skimp on quality as they want to retain or increase brand loyalty .
Customers can expect better customer service and better pricing for products and services from the firms in an oligopoly because of the small number of participants.
Disadvantages
Oligopolies come with higher barriers to entry for new participants. This means that it can be difficult to enter the market because of the high costs associated with doing business, the regulatory environment, and the problems that arise when it comes to accessing supply and distribution channels .
Because of the lack of competition, there may be very little incentive to innovate product and service offerings. With no diversity in offerings, consumers remain loyal to what they know best.
Although there may be more quality products on the market, consumers often have little choice available to them. This means they can only rely on a small pool of goods and services on which to spend their money.
Limited competition
Higher profits for companies
Greater consumer demand
Higher quality products and services
Better customer service and pricing
High barriers to entry for new participants
Lack of innovation
Very little choice for consumers
Example of an Oligopoly
There are many examples of oligopolies in the market. But one of the major examples of a global oligopoly is the Organization of the Petroleum Exporting Countries (OPEC) . The organization was founded in Baghdad in 1960 with five countries but expanded to 13 oil-producing countries in 1975.
One of the main reasons why OPEC is considered an oligopoly is because it has no overarching authority. Every member nation within the group also has a substantial portion of the group's market share. These countries also have a great deal of power together (not separately) when it comes to supply and demand issues and pricing. So when the group lowers its supply as demand drops, prices rise. The opposite is true when demand rises.
What Are Some Negative Effects of an Oligopoly?
An oligopoly is when a few companies exert significant control over a given market. Together, these companies may control prices by colluding with each other, ultimately providing uncompetitive prices in the market. Among other detrimental effects of an oligopoly include limiting new entrants in the market and decreased innovation. Oligopolies have been found in the oil industry, railroad companies, wireless carriers, and big tech.
What Is an Example of a Current Oligopoly?
One measure that shows if an oligopoly is present is the concentration ratio, which calculates the size of companies in comparison to their industry. Instances where a high concentration ratio is present include mass media. In the U.S., for example, the sector is dominated by just five companies: NBC Universal; Walt Disney; Time Warner; Viacom CBS; and News Corporationโeven as streaming services like Netflix and Amazon Prime begin to encroach on this market. Meanwhile, within big tech, two companies control smartphone operating systems: Google Android and Apple iOS.
Is the U.S. Airline Industry an Oligopoly?
With just four companies controlling nearly two-thirds of all domestic flights in the U.S. as of 2021, it has been purported that the airline industry is an oligopoly. These four companies are Delta Airlines, United Airlines Holdings, Southwest Airlines, and American Airlines. According to a report compiled by the White House, "reduced competition contributes to increasing fees like baggage and cancellation fees. These fees are often raised in lockstep, demonstrating a lack of meaningful competitive pressure, and are often hidden from consumers at the point of purchase." Interestingly, in 1978, The Airline Deregulation Act was imposed, which stripped away the Civil Aeronautics Board the ability to regulate the industry. Prior to this time, the airline industry operated much like a public utility, while fare prices had declined 20 years before the deregulation was introduced.ย
There is no such thing as perfect competition in the market. But there are different market structures, including oligopolies. These types of markets are characterized by a small number of participating firms that work together to set prices. Companies benefit because there is very little competition while consumers are able to choose from better quality products and services.
Organization of Petroleum Exporting Countries. " Brief History ."
The White House. " Fact Sheet for Executive Order on Promoting Competition in the American Economy ."
Congress.gov. " S.2493 - Airline Deregulation Act ."
- Antitrust Laws: What They Are, How They Work, Major Examples 1 of 24
- Understanding Antitrust Laws 2 of 24
- Federal Trade Commission (FTC): What It Is and What It Does 3 of 24
- Clayton Antitrust Act of 1914: History, Amendments, Significance 4 of 24
- Sherman Antitrust Act: Definition, History, and What It Does 5 of 24
- Robinson-Patman Act Definition and Criticisms 6 of 24
- How and Why Companies Become Monopolies 7 of 24
- Discriminating Monopoly: Definition, How It Works, and Example 8 of 24
- What Is Price Discrimination, and How Does It Work? 9 of 24
- Predatory Pricing: Definition, Example, and Why It's Used 10 of 24
- Bid Rigging: Examples and FAQs About the Illegal Practice 11 of 24
- Price Maker: Overview, Examples, Laws Governing and FAQ 12 of 24
- What Is a Cartel? Definition, Examples, and Legality 13 of 24
- Monopolistic Markets: Characteristics, History, and Effects 14 of 24
- Monopolistic Competition: Definition, How it Works, Pros and Cons 15 of 24
- What Are the Characteristics of a Monopolistic Market? 16 of 24
- Monopolistic Market vs. Perfect Competition: What's the Difference? 17 of 24
- What are Some Examples of Monopolistic Markets? 18 of 24
- A History of U.S. Monopolies 19 of 24
- What Are the Most Famous Monopolies? 20 of 24
- Monopoly vs. Oligopoly: What's the Difference? 21 of 24
- Oligopoly: Meaning and Characteristics in a Market 22 of 24
- Duopoly: Definition in Economics, Types, and Examples 23 of 24
- Oligopolies: Some Current Examples 24 of 24
- Terms of Service
- Editorial Policy
- Privacy Policy
- Your Privacy Choices
Defining and measuring oligopoly
Concentration ratios
Example of a hypothetical concentration ratio, fixed broadband services, fuel retailing, further examples, the herfindahl โ hirschman index (h-h index), key characteristics, interdependence.
- Whether to compete with rivals, or collude with them.
- Whether to raise or lower price, or keep price constant.
- Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. The advantages of โgoing firstโ or โgoing secondโ are respectively called 1st and 2nd-mover advantage. Sometimes it pays to go first because a firm can generate head-start profits. 2nd mover advantage occurs when it pays to wait and see what new strategies are launched by rivals, and then try to improve on them or find ways to undermine them.
Barriers to entry
Natural entry barriers include:, economies of large scale production., ownership or control of a key scarce resource, high set-up costs, high r&d costs, artificial barriers include:, predatory pricing, limit pricing, superior knowledge, predatory acquisition, advertising, a strong brand, loyalty schemes, exclusive contracts, patents and licences, vertical integration, collusive oligopolies, types of collusion, competitive oligopolies, pricing strategies of oligopolies.
- Oligopolists may use predatory pricing to force rivals out of the market. This means keeping price artificially low, and often below the full cost of production.
- They may also operate a limit-pricing strategy to deter entrants, which is also called entry forestalling price .
- Oligopolists may collude with rivals and raise price together, but this may attract new entrants.
- Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level. Cost-plus pricing is also called rule of thumb pricing.There are different versions of cost-pus pricing, includingย full cost pricing , where all costs - that is, fixed and variable costs - are calculated, plus a mark up for profits, and contribution pricing , where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits.
Non-price strategies
- Trying to improve quality and after sales servicing, such as offering extended guarantees.
- Spending on advertising, sponsorship and product placement - also called hidden advertising โ is very significant to many oligopolists. The UK's football Premiership has long been sponsored by firms in oligopolies, including Barclays Bank and Carling.
- Sales promotion, such as buy-one-get-one-free (BOGOF), is associated with the large supermarkets, which is a highly oligopolistic market, dominated by three or four large chains.
- Loyalty schemes, which are common in the supermarket sector, such as Sainsburyโs Nectar Card and Tescoโs Club Card .
- How successful is it likely to be?
- Will rivals be able to copy the strategy?
- Will the firms get a 1st - mover advantage?
- How expensive is it to introduce the strategy? If the cost of implementation is greater than the pay-off, clearly it will be rejected.
- How long will it take to work? A strategy that takes five years to generate a pay-off may be rejected in favour of a strategy with a quicker pay-off.
Price stickiness
Kinked demand curve.
Maximising profits
A game theory approach to price stickiness.
- Raise price
- Lower price
- Keep price constant
The Prisonerโs Dilemma
- Higher prices or hidden prices, such as the hidden charges in credit card transactions
- Lower output
- Restricted choice or other limiting conditions associated with the transaction
Examples of Oligopoly
Evaluation of oligopolies, the disadvantages of oligopolies.
- High concentration reduces consumer choice.
- Cartel-like behaviour reduces competition and can lead to higher prices and reduced output.
- Given the lack of competition, oligopolists may be free to engage in the manipulation of consumer decision making. By making decisions more complex - such as financial decisions about mortgages - individual consumers fall back on heuristics and rule of thumb processes, which can lead to decision making bias and irrational behaviour, including making purchases which add no utility or even harm the individual consumer.
- Firms can be prevented from entering a market because of deliberate barriers to entry .
- There is a potential loss of economic welfare.
- Oligopolists may be allocatively and productively inefficient .
The advantages of oligopolies
- Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures , such as lower prices. Even though there are a few firms, making the market uncompetitive, their behaviour may be highly competitive.
- Oligopolists may be dynamically efficient in terms of innovation and new product and process development. The super-normal profits they generate may be used to innovate, in which case the consumer may gain.
- Price stability may bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilises their expenditure, which may help stabilise the trade cycle.
Test your knowledge with a quiz
Press next to launch the quiz, you are allowed two attempts - feedback is provided after each question is attempted..
Game Theory
Monopolistic competition
What Makes a Market an Oligopoly?
Do you know of any industries in which just three or four companies supply most of a specific product?
Some examples:
- From the 1950s to the 1980s, three major broadcast television networks dominated the U.S. airwaves.
- After a series of mergers between 2005 and 2015, four major airlines controlled much of the U.S. market, as a November 2018 Page One Economics essay described.
- Even more recently, shortages and price increases brought attention to the U.S. baby formula market and global insulin market, which also had just a few suppliers.
Those markets could be considered “oligopolies”—markets in which only a few sellers or suppliers dominate.
Suppliers and sellers in an oligopoly can command higher prices than companies in a competitive market, and if one company in an oligopoly stops producing, it has a bigger effect on supply than it would in a competitive market.
Read on for more comparisons of oligopolies to other types of markets and to learn how to tell whether a particular market could be considered an oligopoly.
What Is an Oligopoly?
As the table shows, in addition to having only a few sellers or suppliers dominating the market, an oligopoly has barriers to entering the market, and “there are few close substitutes for the product.”
In other words, certain conditions make it difficult for potential competitors to start selling or supplying a particular product or service within that industry, and there aren’t many alternatives that could be used instead. Monopolies—markets in which one firm dominates—also have those barriers.
“Barriers to entry” could include factors such as costly equipment needed to produce a product, patents restricting who can use an invention, and government regulations that are difficult to meet, as a Corporate Finance Institute article outlined.
What Are Examples of Barriers to Entry?
In the case of the U.S. infant formula market, barriers to entry have included tariffs and Food and Drug Administration standards . (Some of the infant formula market barriers were waived to help ease the shortage last year.)
Until the expansion of the cable TV market in the 1980s, the limited availability of broadcast frequencies helped to restrict the number of television networks, with the Federal Communications Commission in charge of allocating portions of the broadcast spectrum to stations.
Barriers to entry in the airline industry include high startup costs, such as for purchasing airplanes, competition for airport gates and large economies of scale, the Page One Economics essay said.
Government can put up barriers, as a St. Louis Fed Econ Lowdown lesson on market structures (PDF) outlined in discussing monopolistic markets. Such markets are rare, according to the lesson.
“Most commonly, [monopolistic markets] occur because government has granted a single firm the opportunity to supply a good or service. This is known as a ‘natural monopoly, ’ ” according to the lesson, which gives the examples of electric and natural gas providers. Because of the expensive infrastructure needed for those services, such as wires and pipes entering people’s homes, it’s cheaper for one firm to provide the service than to build infrastructure needed for true competition.
“In exchange, government often regulates prices in these markets to ensure that these firms do not take advantage of their market power,” the lesson says.
How Can You Tell If a Market Is an Oligopoly?
A “concentration ratio” is one tool that can indicate whether a market is an oligopoly.
A concentration ratio is the combined market share of the largest firms in an industry, according to Oxford Reference . That is, it’s the percentage of the industry’s products or services provided by those firms.
The number of firms used for the ratio can vary. A “four-firm” ratio is often used as a benchmark to show market structure, according to Oxford. But the ratios also can be calculated using the market share from the eight, five or three largest firms in the market, according to a September 2020 Investopedia article.
“A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60% of total market sales,” the article says. “If the concentration ratio of one company is equal to 100%, this indicates that the industry is a monopoly.”
In 2015, the four major airlines controlled 80% of the U.S. market, the Page One Economics essay said. Three manufacturers have more than 90% of the global insulin market , according to a July 2022 press release from Grand View Research, a global market research and consulting company. That would make those markets oligopolies, according to the Investopedia rule of thumb.
What Are Two Types of Oligopolistic Markets?
Oligopolistic markets differ, and different types of markets have different effects on prices, as the Econ Lowdown lesson illustrates.
One such market is a collusive oligopoly , which has a few sellers who work together “to divide the market, set prices, or limit production,” the lesson says. Companies might, for example, agree to limit production to drive up prices. Such collusion is often illegal.
In a competitive oligopoly , the few sellers compete, which keeps the prices lower than they would be in a collusive oligopoly.
In general, more competition results in lower prices for consumers. So, a perfect competition market structure, in which lots of companies provide the same product, would result in lower prices, while a monopoly could mean the highest prices for consumers. Depending on whether they are collusive or competitive, oligopolies can be more like monopolies or more like perfect competition, respectively, as a Khan Academy video explains.
Can Oligopolies Change?
Market structures aren’t necessarily fixed, as the Page One Economics essay illustrated with the example of U.S. airlines.
Airline ticket prices declined as low-cost carriers started expanding their routes in 2016, the essay said. A chart from online database FRED shows the downward trend in airfares before the COVID-19 pandemic.
“The proliferation of low-cost flights in recent years has pushed the airline industry, which was arguably an oligopoly, toward monopolistic competition,” the essay said.
Heather Hennerich is a senior editor with the St. Louis Fed External Engagement and Corporate Communications Division.
Related Topics
This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
Media questions
All other blog-related questions
- Search Menu
- Browse content in A - General Economics and Teaching
- Browse content in A1 - General Economics
- A10 - General
- A12 - Relation of Economics to Other Disciplines
- A13 - Relation of Economics to Social Values
- A14 - Sociology of Economics
- Browse content in A2 - Economic Education and Teaching of Economics
- A29 - Other
- Browse content in B - History of Economic Thought, Methodology, and Heterodox Approaches
- B0 - General
- Browse content in B1 - History of Economic Thought through 1925
- B11 - Preclassical (Ancient, Medieval, Mercantilist, Physiocratic)
- B12 - Classical (includes Adam Smith)
- Browse content in B2 - History of Economic Thought since 1925
- B20 - General
- B21 - Microeconomics
- B22 - Macroeconomics
- B25 - Historical; Institutional; Evolutionary; Austrian
- B26 - Financial Economics
- Browse content in B3 - History of Economic Thought: Individuals
- B31 - Individuals
- Browse content in B4 - Economic Methodology
- B41 - Economic Methodology
- Browse content in B5 - Current Heterodox Approaches
- B55 - Social Economics
- Browse content in C - Mathematical and Quantitative Methods
- Browse content in C0 - General
- C00 - General
- C02 - Mathematical Methods
- Browse content in C1 - Econometric and Statistical Methods and Methodology: General
- C10 - General
- C11 - Bayesian Analysis: General
- C12 - Hypothesis Testing: General
- C13 - Estimation: General
- C14 - Semiparametric and Nonparametric Methods: General
- C15 - Statistical Simulation Methods: General
- C19 - Other
- Browse content in C2 - Single Equation Models; Single Variables
- C21 - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions
- C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C23 - Panel Data Models; Spatio-temporal Models
- C24 - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
- C25 - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
- C26 - Instrumental Variables (IV) Estimation
- Browse content in C3 - Multiple or Simultaneous Equation Models; Multiple Variables
- C31 - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
- C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C33 - Panel Data Models; Spatio-temporal Models
- C34 - Truncated and Censored Models; Switching Regression Models
- C35 - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- C36 - Instrumental Variables (IV) Estimation
- Browse content in C4 - Econometric and Statistical Methods: Special Topics
- C41 - Duration Analysis; Optimal Timing Strategies
- C43 - Index Numbers and Aggregation
- Browse content in C5 - Econometric Modeling
- C51 - Model Construction and Estimation
- C52 - Model Evaluation, Validation, and Selection
- C53 - Forecasting and Prediction Methods; Simulation Methods
- C54 - Quantitative Policy Modeling
- Browse content in C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- C60 - General
- C61 - Optimization Techniques; Programming Models; Dynamic Analysis
- C62 - Existence and Stability Conditions of Equilibrium
- C63 - Computational Techniques; Simulation Modeling
- Browse content in C7 - Game Theory and Bargaining Theory
- C71 - Cooperative Games
- C72 - Noncooperative Games
- C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- C78 - Bargaining Theory; Matching Theory
- Browse content in C8 - Data Collection and Data Estimation Methodology; Computer Programs
- C81 - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
- C82 - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- C83 - Survey Methods; Sampling Methods
- Browse content in C9 - Design of Experiments
- C90 - General
- C91 - Laboratory, Individual Behavior
- C92 - Laboratory, Group Behavior
- C93 - Field Experiments
- Browse content in D - Microeconomics
- Browse content in D0 - General
- D00 - General
- D01 - Microeconomic Behavior: Underlying Principles
- D02 - Institutions: Design, Formation, Operations, and Impact
- D03 - Behavioral Microeconomics: Underlying Principles
- D04 - Microeconomic Policy: Formulation; Implementation, and Evaluation
- Browse content in D1 - Household Behavior and Family Economics
- D10 - General
- D11 - Consumer Economics: Theory
- D12 - Consumer Economics: Empirical Analysis
- D13 - Household Production and Intrahousehold Allocation
- D14 - Household Saving; Personal Finance
- D15 - Intertemporal Household Choice: Life Cycle Models and Saving
- D16 - Collaborative Consumption
- D18 - Consumer Protection
- D19 - Other
- Browse content in D2 - Production and Organizations
- D21 - Firm Behavior: Theory
- D22 - Firm Behavior: Empirical Analysis
- D23 - Organizational Behavior; Transaction Costs; Property Rights
- D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D29 - Other
- Browse content in D3 - Distribution
- D30 - General
- D31 - Personal Income, Wealth, and Their Distributions
- D33 - Factor Income Distribution
- Browse content in D4 - Market Structure, Pricing, and Design
- D40 - General
- D41 - Perfect Competition
- D43 - Oligopoly and Other Forms of Market Imperfection
- D44 - Auctions
- Browse content in D5 - General Equilibrium and Disequilibrium
- D50 - General
- D53 - Financial Markets
- D58 - Computable and Other Applied General Equilibrium Models
- Browse content in D6 - Welfare Economics
- D60 - General
- D61 - Allocative Efficiency; Cost-Benefit Analysis
- D62 - Externalities
- D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D64 - Altruism; Philanthropy
- D69 - Other
- Browse content in D7 - Analysis of Collective Decision-Making
- D70 - General
- D71 - Social Choice; Clubs; Committees; Associations
- D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- D73 - Bureaucracy; Administrative Processes in Public Organizations; Corruption
- D74 - Conflict; Conflict Resolution; Alliances; Revolutions
- D78 - Positive Analysis of Policy Formulation and Implementation
- Browse content in D8 - Information, Knowledge, and Uncertainty
- D80 - General
- D81 - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Asymmetric and Private Information; Mechanism Design
- D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 - Expectations; Speculations
- D85 - Network Formation and Analysis: Theory
- D86 - Economics of Contract: Theory
- Browse content in D9 - Micro-Based Behavioral Economics
- D90 - General
- D91 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing
- Browse content in E - Macroeconomics and Monetary Economics
- Browse content in E0 - General
- E00 - General
- E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
- E02 - Institutions and the Macroeconomy
- Browse content in E1 - General Aggregative Models
- E10 - General
- E11 - Marxian; Sraffian; Kaleckian
- E12 - Keynes; Keynesian; Post-Keynesian
- E13 - Neoclassical
- E19 - Other
- Browse content in E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E20 - General
- E21 - Consumption; Saving; Wealth
- E22 - Investment; Capital; Intangible Capital; Capacity
- E23 - Production
- E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E25 - Aggregate Factor Income Distribution
- E27 - Forecasting and Simulation: Models and Applications
- Browse content in E3 - Prices, Business Fluctuations, and Cycles
- E30 - General
- E31 - Price Level; Inflation; Deflation
- E32 - Business Fluctuations; Cycles
- E37 - Forecasting and Simulation: Models and Applications
- Browse content in E4 - Money and Interest Rates
- E40 - General
- E41 - Demand for Money
- E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
- E43 - Interest Rates: Determination, Term Structure, and Effects
- E44 - Financial Markets and the Macroeconomy
- E47 - Forecasting and Simulation: Models and Applications
- Browse content in E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E50 - General
- E51 - Money Supply; Credit; Money Multipliers
- E52 - Monetary Policy
- E58 - Central Banks and Their Policies
- Browse content in E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- E60 - General
- E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62 - Fiscal Policy
- E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- E65 - Studies of Particular Policy Episodes
- E69 - Other
- Browse content in E7 - Macro-Based Behavioral Economics
- E70 - General
- E71 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
- Browse content in F - International Economics
- Browse content in F0 - General
- F02 - International Economic Order and Integration
- Browse content in F1 - Trade
- F10 - General
- F11 - Neoclassical Models of Trade
- F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F13 - Trade Policy; International Trade Organizations
- F14 - Empirical Studies of Trade
- F15 - Economic Integration
- F16 - Trade and Labor Market Interactions
- F17 - Trade Forecasting and Simulation
- F18 - Trade and Environment
- Browse content in F2 - International Factor Movements and International Business
- F21 - International Investment; Long-Term Capital Movements
- F22 - International Migration
- F23 - Multinational Firms; International Business
- F24 - Remittances
- Browse content in F3 - International Finance
- F30 - General
- F31 - Foreign Exchange
- F32 - Current Account Adjustment; Short-Term Capital Movements
- F33 - International Monetary Arrangements and Institutions
- F34 - International Lending and Debt Problems
- F35 - Foreign Aid
- F36 - Financial Aspects of Economic Integration
- F37 - International Finance Forecasting and Simulation: Models and Applications
- Browse content in F4 - Macroeconomic Aspects of International Trade and Finance
- F40 - General
- F41 - Open Economy Macroeconomics
- F42 - International Policy Coordination and Transmission
- F43 - Economic Growth of Open Economies
- F44 - International Business Cycles
- F45 - Macroeconomic Issues of Monetary Unions
- Browse content in F5 - International Relations, National Security, and International Political Economy
- F50 - General
- F51 - International Conflicts; Negotiations; Sanctions
- F52 - National Security; Economic Nationalism
- F53 - International Agreements and Observance; International Organizations
- F55 - International Institutional Arrangements
- F59 - Other
- Browse content in F6 - Economic Impacts of Globalization
- F62 - Macroeconomic Impacts
- F63 - Economic Development
- F64 - Environment
- Browse content in G - Financial Economics
- Browse content in G0 - General
- G01 - Financial Crises
- G02 - Behavioral Finance: Underlying Principles
- Browse content in G1 - General Financial Markets
- G10 - General
- G11 - Portfolio Choice; Investment Decisions
- G12 - Asset Pricing; Trading volume; Bond Interest Rates
- G14 - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - International Financial Markets
- G18 - Government Policy and Regulation
- Browse content in G2 - Financial Institutions and Services
- G20 - General
- G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G22 - Insurance; Insurance Companies; Actuarial Studies
- G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
- G28 - Government Policy and Regulation
- Browse content in G3 - Corporate Finance and Governance
- G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Bankruptcy; Liquidation
- G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
- G35 - Payout Policy
- G38 - Government Policy and Regulation
- Browse content in H - Public Economics
- Browse content in H0 - General
- H00 - General
- Browse content in H1 - Structure and Scope of Government
- H10 - General
- H11 - Structure, Scope, and Performance of Government
- H12 - Crisis Management
- Browse content in H2 - Taxation, Subsidies, and Revenue
- H20 - General
- H21 - Efficiency; Optimal Taxation
- H22 - Incidence
- H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H25 - Business Taxes and Subsidies
- H26 - Tax Evasion and Avoidance
- Browse content in H3 - Fiscal Policies and Behavior of Economic Agents
- H30 - General
- H31 - Household
- Browse content in H4 - Publicly Provided Goods
- H40 - General
- H41 - Public Goods
- H42 - Publicly Provided Private Goods
- Browse content in H5 - National Government Expenditures and Related Policies
- H50 - General
- H51 - Government Expenditures and Health
- H52 - Government Expenditures and Education
- H53 - Government Expenditures and Welfare Programs
- H54 - Infrastructures; Other Public Investment and Capital Stock
- H55 - Social Security and Public Pensions
- H56 - National Security and War
- Browse content in H6 - National Budget, Deficit, and Debt
- H60 - General
- H61 - Budget; Budget Systems
- H62 - Deficit; Surplus
- H63 - Debt; Debt Management; Sovereign Debt
- Browse content in H7 - State and Local Government; Intergovernmental Relations
- H70 - General
- H71 - State and Local Taxation, Subsidies, and Revenue
- H72 - State and Local Budget and Expenditures
- H75 - State and Local Government: Health; Education; Welfare; Public Pensions
- H76 - State and Local Government: Other Expenditure Categories
- H77 - Intergovernmental Relations; Federalism; Secession
- Browse content in H8 - Miscellaneous Issues
- H83 - Public Administration; Public Sector Accounting and Audits
- H84 - Disaster Aid
- H87 - International Fiscal Issues; International Public Goods
- Browse content in I - Health, Education, and Welfare
- Browse content in I0 - General
- I00 - General
- Browse content in I1 - Health
- I10 - General
- I12 - Health Behavior
- I14 - Health and Inequality
- I15 - Health and Economic Development
- I18 - Government Policy; Regulation; Public Health
- I19 - Other
- Browse content in I2 - Education and Research Institutions
- I20 - General
- I21 - Analysis of Education
- I22 - Educational Finance; Financial Aid
- I23 - Higher Education; Research Institutions
- I24 - Education and Inequality
- I25 - Education and Economic Development
- I26 - Returns to Education
- I28 - Government Policy
- I29 - Other
- Browse content in I3 - Welfare, Well-Being, and Poverty
- I30 - General
- I31 - General Welfare
- I32 - Measurement and Analysis of Poverty
- I38 - Government Policy; Provision and Effects of Welfare Programs
- Browse content in J - Labor and Demographic Economics
- Browse content in J0 - General
- J00 - General
- J01 - Labor Economics: General
- J08 - Labor Economics Policies
- Browse content in J1 - Demographic Economics
- J10 - General
- J11 - Demographic Trends, Macroeconomic Effects, and Forecasts
- J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse
- J13 - Fertility; Family Planning; Child Care; Children; Youth
- J14 - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
- J15 - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
- J16 - Economics of Gender; Non-labor Discrimination
- J17 - Value of Life; Forgone Income
- J18 - Public Policy
- Browse content in J2 - Demand and Supply of Labor
- J20 - General
- J21 - Labor Force and Employment, Size, and Structure
- J22 - Time Allocation and Labor Supply
- J23 - Labor Demand
- J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
- J26 - Retirement; Retirement Policies
- J28 - Safety; Job Satisfaction; Related Public Policy
- Browse content in J3 - Wages, Compensation, and Labor Costs
- J30 - General
- J31 - Wage Level and Structure; Wage Differentials
- J32 - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
- J33 - Compensation Packages; Payment Methods
- J38 - Public Policy
- Browse content in J4 - Particular Labor Markets
- J41 - Labor Contracts
- J42 - Monopsony; Segmented Labor Markets
- J45 - Public Sector Labor Markets
- J46 - Informal Labor Markets
- Browse content in J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining
- J50 - General
- J51 - Trade Unions: Objectives, Structure, and Effects
- J52 - Dispute Resolution: Strikes, Arbitration, and Mediation; Collective Bargaining
- J53 - Labor-Management Relations; Industrial Jurisprudence
- J54 - Producer Cooperatives; Labor Managed Firms; Employee Ownership
- J58 - Public Policy
- Browse content in J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers
- J60 - General
- J61 - Geographic Labor Mobility; Immigrant Workers
- J62 - Job, Occupational, and Intergenerational Mobility
- J63 - Turnover; Vacancies; Layoffs
- J64 - Unemployment: Models, Duration, Incidence, and Job Search
- J65 - Unemployment Insurance; Severance Pay; Plant Closings
- J68 - Public Policy
- Browse content in J7 - Labor Discrimination
- J71 - Discrimination
- Browse content in J8 - Labor Standards: National and International
- J81 - Working Conditions
- J88 - Public Policy
- Browse content in K - Law and Economics
- Browse content in K0 - General
- K00 - General
- Browse content in K1 - Basic Areas of Law
- K11 - Property Law
- K12 - Contract Law
- K13 - Tort Law and Product Liability; Forensic Economics
- K14 - Criminal Law
- K16 - Election Law
- Browse content in K3 - Other Substantive Areas of Law
- K31 - Labor Law
- K32 - Environmental, Health, and Safety Law
- K34 - Tax Law
- K37 - Immigration Law
- Browse content in K4 - Legal Procedure, the Legal System, and Illegal Behavior
- K41 - Litigation Process
- K42 - Illegal Behavior and the Enforcement of Law
- K49 - Other
- Browse content in L - Industrial Organization
- Browse content in L0 - General
- L00 - General
- Browse content in L1 - Market Structure, Firm Strategy, and Market Performance
- L10 - General
- L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
- L12 - Monopoly; Monopolization Strategies
- L13 - Oligopoly and Other Imperfect Markets
- L14 - Transactional Relationships; Contracts and Reputation; Networks
- L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
- Browse content in L2 - Firm Objectives, Organization, and Behavior
- L20 - General
- L21 - Business Objectives of the Firm
- L22 - Firm Organization and Market Structure
- L23 - Organization of Production
- L24 - Contracting Out; Joint Ventures; Technology Licensing
- L25 - Firm Performance: Size, Diversification, and Scope
- L26 - Entrepreneurship
- L29 - Other
- Browse content in L3 - Nonprofit Organizations and Public Enterprise
- L30 - General
- L31 - Nonprofit Institutions; NGOs; Social Entrepreneurship
- L32 - Public Enterprises; Public-Private Enterprises
- L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting Out
- Browse content in L4 - Antitrust Issues and Policies
- L40 - General
- L41 - Monopolization; Horizontal Anticompetitive Practices
- L43 - Legal Monopolies and Regulation or Deregulation
- Browse content in L5 - Regulation and Industrial Policy
- L50 - General
- L51 - Economics of Regulation
- L52 - Industrial Policy; Sectoral Planning Methods
- L53 - Enterprise Policy
- Browse content in L6 - Industry Studies: Manufacturing
- L60 - General
- L66 - Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
- Browse content in L7 - Industry Studies: Primary Products and Construction
- L71 - Mining, Extraction, and Refining: Hydrocarbon Fuels
- L78 - Government Policy
- Browse content in L8 - Industry Studies: Services
- L81 - Retail and Wholesale Trade; e-Commerce
- L83 - Sports; Gambling; Recreation; Tourism
- L86 - Information and Internet Services; Computer Software
- Browse content in L9 - Industry Studies: Transportation and Utilities
- L94 - Electric Utilities
- L98 - Government Policy
- Browse content in M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
- Browse content in M1 - Business Administration
- M12 - Personnel Management; Executives; Executive Compensation
- M14 - Corporate Culture; Social Responsibility
- M16 - International Business Administration
- Browse content in M3 - Marketing and Advertising
- M31 - Marketing
- Browse content in M5 - Personnel Economics
- M50 - General
- M51 - Firm Employment Decisions; Promotions
- M52 - Compensation and Compensation Methods and Their Effects
- M53 - Training
- M54 - Labor Management
- M55 - Labor Contracting Devices
- Browse content in N - Economic History
- Browse content in N1 - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
- N10 - General, International, or Comparative
- N11 - U.S.; Canada: Pre-1913
- N12 - U.S.; Canada: 1913-
- N13 - Europe: Pre-1913
- N15 - Asia including Middle East
- Browse content in N2 - Financial Markets and Institutions
- N20 - General, International, or Comparative
- N24 - Europe: 1913-
- N25 - Asia including Middle East
- Browse content in N3 - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy
- N31 - U.S.; Canada: Pre-1913
- N33 - Europe: Pre-1913
- N34 - Europe: 1913-
- Browse content in N4 - Government, War, Law, International Relations, and Regulation
- N40 - General, International, or Comparative
- N45 - Asia including Middle East
- N47 - Africa; Oceania
- Browse content in N5 - Agriculture, Natural Resources, Environment, and Extractive Industries
- N50 - General, International, or Comparative
- N53 - Europe: Pre-1913
- N57 - Africa; Oceania
- Browse content in N7 - Transport, Trade, Energy, Technology, and Other Services
- N70 - General, International, or Comparative
- N72 - U.S.; Canada: 1913-
- Browse content in N9 - Regional and Urban History
- N97 - Africa; Oceania
- Browse content in O - Economic Development, Innovation, Technological Change, and Growth
- Browse content in O1 - Economic Development
- O10 - General
- O11 - Macroeconomic Analyses of Economic Development
- O12 - Microeconomic Analyses of Economic Development
- O13 - Agriculture; Natural Resources; Energy; Environment; Other Primary Products
- O14 - Industrialization; Manufacturing and Service Industries; Choice of Technology
- O15 - Human Resources; Human Development; Income Distribution; Migration
- O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O18 - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
- O19 - International Linkages to Development; Role of International Organizations
- Browse content in O2 - Development Planning and Policy
- O22 - Project Analysis
- O23 - Fiscal and Monetary Policy in Development
- O24 - Trade Policy; Factor Movement Policy; Foreign Exchange Policy
- O25 - Industrial Policy
- Browse content in O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
- O30 - General
- O31 - Innovation and Invention: Processes and Incentives
- O32 - Management of Technological Innovation and R&D
- O33 - Technological Change: Choices and Consequences; Diffusion Processes
- O34 - Intellectual Property and Intellectual Capital
- O38 - Government Policy
- O39 - Other
- Browse content in O4 - Economic Growth and Aggregate Productivity
- O40 - General
- O41 - One, Two, and Multisector Growth Models
- O42 - Monetary Growth Models
- O43 - Institutions and Growth
- O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
- O49 - Other
- Browse content in O5 - Economywide Country Studies
- O50 - General
- O52 - Europe
- O53 - Asia including Middle East
- O55 - Africa
- O57 - Comparative Studies of Countries
- Browse content in P - Economic Systems
- Browse content in P1 - Capitalist Systems
- P10 - General
- P13 - Cooperative Enterprises
- P16 - Political Economy
- P17 - Performance and Prospects
- Browse content in P2 - Socialist Systems and Transitional Economies
- P20 - General
- P26 - Political Economy; Property Rights
- Browse content in P3 - Socialist Institutions and Their Transitions
- P31 - Socialist Enterprises and Their Transitions
- Browse content in P4 - Other Economic Systems
- P48 - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
- Browse content in P5 - Comparative Economic Systems
- P50 - General
- Browse content in Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
- Browse content in Q0 - General
- Q02 - Commodity Markets
- Browse content in Q1 - Agriculture
- Q11 - Aggregate Supply and Demand Analysis; Prices
- Q13 - Agricultural Markets and Marketing; Cooperatives; Agribusiness
- Q15 - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
- Q16 - R&D; Agricultural Technology; Biofuels; Agricultural Extension Services
- Q17 - Agriculture in International Trade
- Q18 - Agricultural Policy; Food Policy
- Browse content in Q2 - Renewable Resources and Conservation
- Q20 - General
- Q22 - Fishery; Aquaculture
- Q23 - Forestry
- Q25 - Water
- Q26 - Recreational Aspects of Natural Resources
- Q29 - Other
- Browse content in Q3 - Nonrenewable Resources and Conservation
- Q30 - General
- Q32 - Exhaustible Resources and Economic Development
- Q33 - Resource Booms
- Q34 - Natural Resources and Domestic and International Conflicts
- Q38 - Government Policy
- Browse content in Q4 - Energy
- Q40 - General
- Q41 - Demand and Supply; Prices
- Q42 - Alternative Energy Sources
- Q43 - Energy and the Macroeconomy
- Q48 - Government Policy
- Browse content in Q5 - Environmental Economics
- Q50 - General
- Q51 - Valuation of Environmental Effects
- Q52 - Pollution Control Adoption Costs; Distributional Effects; Employment Effects
- Q53 - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
- Q54 - Climate; Natural Disasters; Global Warming
- Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
- Q58 - Government Policy
- Browse content in R - Urban, Rural, Regional, Real Estate, and Transportation Economics
- Browse content in R1 - General Regional Economics
- R10 - General
- R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
- R15 - Econometric and Input-Output Models; Other Models
- Browse content in R2 - Household Analysis
- R23 - Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
- R29 - Other
- Browse content in R4 - Transportation Economics
- R40 - General
- R41 - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
- Browse content in R5 - Regional Government Analysis
- R58 - Regional Development Planning and Policy
- Browse content in Z - Other Special Topics
- Browse content in Z1 - Cultural Economics; Economic Sociology; Economic Anthropology
- Z10 - General
- Z11 - Economics of the Arts and Literature
- Z12 - Religion
- Z13 - Economic Sociology; Economic Anthropology; Social and Economic Stratification
- Z19 - Other
- Browse content in Z2 - Sports Economics
- Z21 - Industry Studies
- Z22 - Labor Issues
- Z29 - Other
- Browse content in Z3 - Tourism Economics
- Z30 - General
- Advance articles
- Author Guidelines
- Submission Site
- Open Access
- About Oxford Economic Papers
- Editorial Board
- Advertising and Corporate Services
- Journals Career Network
- Self-Archiving Policy
- Dispatch Dates
- Terms and Conditions
- Journals on Oxford Academic
- Books on Oxford Academic
Article Contents
- 1. Introduction
- 3. Empirical method
- 4. British supermarket competition
- 5. Identifying the leadership structure amongst British supermarkets
- 6. Conclusion
- Supplementary material
- Acknowledgements
- < Previous
Identifying price-leadership structures in oligopoly
- Article contents
- Figures & tables
- Supplementary Data
Sang-Hyun Kim, Hao Lan, Paul W Dobson, Identifying price-leadership structures in oligopoly, Oxford Economic Papers , Volume 73, Issue 1, January 2021, Pages 350โ370, https://doi.org/10.1093/oep/gpz066
- Permissions Icon Permissions
Oligopoly can give rise to complex patterns of price interaction and adjustment. While oligopolistic firms may divide into price leaders and price followers, it is conceivable that some may take on dual roles, being a leader to one group but a follower to a different group in a hierarchical structure. The contribution of this article is to show how such dual relationships are possible in theory along with providing an empirical method to help identify price-leadership structures in n -firm oligopoly. As an illustration, we apply the method to British supermarkets and find a three-tier leaderโfollower structure.
Email alerts
Citing articles via.
- Recommend to your Library
Affiliations
- Online ISSN 1464-3812
- Print ISSN 0030-7653
- Copyright © 2024 Oxford University Press
- About Oxford Academic
- Publish journals with us
- University press partners
- What we publish
- New features
- Open access
- Institutional account management
- Rights and permissions
- Get help with access
- Accessibility
- Advertising
- Media enquiries
- Oxford University Press
- Oxford Languages
- University of Oxford
Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide
- Copyright ยฉ 2024 Oxford University Press
- Cookie settings
- Cookie policy
- Privacy policy
- Legal notice
This Feature Is Available To Subscribers Only
Sign In or Create an Account
This PDF is available to Subscribers Only
For full access to this pdf, sign in to an existing account, or purchase an annual subscription.
Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.
Chapter 10. Monopolistic Competition and Oligopoly
10.2 Oligopoly
Learning objectives.
- Explain why and how oligopolies exist
- Contrast collusion and competition
- Interpret and analyze the prisonerโs dilemma diagram
- Evaluate the tradeoffs of imperfect competition
Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. Oligopolies are typically characterized by mutual interdependence where various decisions such as output, price, advertising, and so on, depend on the decisions of the other firm(s). Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time.
Why Do Oligopolies Exist?
A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly. For example, when a government grants a patent for an invention to one firm, it may create a monopoly. When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure, those three firms may become an oligopoly.
Similarly, a natural monopoly will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve. In such a setting, the market has room for only one firm, because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market.
Quantity demanded in the market may also be two or three times the quantity needed to produce at the minimum of the average cost curveโwhich means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products). Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that they would not be able to sell it at a profitable price. This combination of economies of scale and market demand creates the barrier to entry, which led to the Boeing-Airbus oligopoly for large passenger aircraft.
The product differentiation at the heart of monopolistic competition can also play a role in creating oligopoly. For example, firms may need to reach a certain minimum size before they are able to spend enough on advertising and marketing to create a recognizable brand name. The problem in competing with, say, Coca-Cola or Pepsi is not that producing fizzy drinks is technologically difficult, but rather that creating a brand name and marketing effort to equal Coke or Pepsi is an enormous task.
Collusion or Competition?
When oligopoly firms in a certain market decide what quantity to produce and what price to charge, they face a temptation to act as if they were a monopoly. By acting together, oligopolistic firms can hold down industry output, charge a higher price, and divide up the profit among themselves. When firms act together in this way to reduce output and keep prices high, it is called collusion . A group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price is called a cartel . See the following Clear It Up feature for a more in-depth analysis of the difference between the two.
Collusion versus cartels: How can I tell which is which?
In the United States, as well as many other countries, it is illegal for firms to collude since collusion is anti-competitive behavior, which is a violation of antitrust law. Both the Antitrust Division of the Justice Department and the Federal Trade Commission have responsibilities for preventing collusion in the United States.
The problem of enforcement is finding hard evidence of collusion. Cartels are formal agreements to collude. Because cartel agreements provide evidence of collusion, they are rare in the United States. Instead, most collusion is tacit, where firms implicitly reach an understanding that competition is bad for profits.
The desire of businesses to avoid competing so that they can instead raise the prices that they charge and earn higher profits has been well understood by economists. Adam Smith wrote in Wealth of Nations in 1776: โPeople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.โ
Even when oligopolists recognize that they would benefit as a group by acting like a monopoly, each individual oligopoly faces a private temptation to produce just a slightly higher quantity and earn slightly higher profitโwhile still counting on the other oligopolists to hold down their production and keep prices high. If at least some oligopolists give in to this temptation and start producing more, then the market price will fall. Indeed, a small handful of oligopoly firms may end up competing so fiercely that they all end up earning zero economic profitsโas if they were perfect competitors.
The Prisonerโs Dilemma
Because of the complexity of oligopoly, which is the result of mutual interdependence among firms, there is no single, generally-accepted theory of how oligopolies behave, in the same way that we have theories for all the other market structures. Instead, economists use game theory , a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. Game theory has found widespread applications in the social sciences, as well as in business, law, and military strategy.
The prisonerโs dilemma is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly. The story behind the prisonerโs dilemma goes like this:
Two co-conspiratorial criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. Eventually, a police officer enters the room where Prisoner A is being held and says: โYou know what? Your partner in the other room is confessing. So your partner is going to get a light prison sentence of just one year, and because youโre remaining silent, the judge is going to stick you with eight years in prison. Why donโt you get smart? If you confess, too, weโll cut your jail time down to five years, and your partner will get five years, also.โ Over in the next room, another police officer is giving exactly the same speech to Prisoner B. What the police officers do not say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will end up with only two years in jail each.
The game theory situation facing the two prisoners is shown in Table 3 . To understand the dilemma, first consider the choices from Prisoner Aโs point of view. If A believes that B will confess, then A ought to confess, too, so as to not get stuck with the eight years in prison. But if A believes that B will not confess, then A will be tempted to act selfishly and confess, so as to serve only one year. The key point is that A has an incentive to confess regardless of what choice B makes! B faces the same set of choices, and thus will have an incentive to confess regardless of what choice A makes. Confess is considered the dominant strategy or the strategy an individual (or firm) will pursue regardless of the other individualโs (or firmโs) decision. The result is that if prisoners pursue their own self-interest, both are likely to confess, and end up doing a total of 10 years of jail time between them.
The game is called a dilemma because if the two prisoners had cooperated by both remaining silent, they would only have had to serve a total of four years of jail time between them. If the two prisoners can work out some way of cooperating so that neither one will confess, they will both be better off than if they each follow their own individual self-interest, which in this case leads straight into longer jail terms.
The Oligopoly Version of the Prisonerโs Dilemma
The members of an oligopoly can face a prisonerโs dilemma, also. If each of the oligopolists cooperates in holding down output, then high monopoly profits are possible. Each oligopolist, however, must worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. Table 4 shows the prisonerโs dilemma for a two-firm oligopolyโknown as a duopoly . If Firms A and B both agree to hold down output, they are acting together as a monopoly and will each earn $1,000 in profits. However, both firmsโ dominant strategy is to increase output, in which case each will earn $400 in profits.
Can the two firms trust each other? Consider the situation of Firm A:
- If A thinks that B will cheat on their agreement and increase output, then A will increase output, too, because for A the profit of $400 when both firms increase output (the bottom right-hand choice in Table 4 ) is better than a profit of only $200 if A keeps output low and B raises output (the upper right-hand choice in the table).
- If A thinks that B will cooperate by holding down output, then A may seize the opportunity to earn higher profits by raising output. After all, if B is going to hold down output, then A can earn $1,500 in profits by expanding output (the bottom left-hand choice in the table) compared with only $1,000 by holding down output as well (the upper left-hand choice in the table).
Thus, firm A will reason that it makes sense to expand output if B holds down output and that it also makes sense to expand output if B raises output. Again, B faces a parallel set of decisions.
The result of this prisonerโs dilemma is often that even though A and B could make the highest combined profits by cooperating in producing a lower level of output and acting like a monopolist, the two firms may well end up in a situation where they each increase output and earn only $400 each in profits . The following Clear It Up feature discusses one cartel scandal in particular.
What is the Lysine cartel?
Lysine, a $600 million-a-year industry, is an amino acid used by farmers as a feed additive to ensure the proper growth of swine and poultry. The primary U.S. producer of lysine is Archer Daniels Midland (ADM), but several other large European and Japanese firms are also in this market. For a time in the first half of the 1990s, the worldโs major lysine producers met together in hotel conference rooms and decided exactly how much each firm would sell and what it would charge. The U.S. Federal Bureau of Investigation (FBI), however, had learned of the cartel and placed wire taps on a number of their phone calls and meetings.
From FBI surveillance tapes, following is a comment that Terry Wilson, president of the corn processing division at ADM, made to the other lysine producers at a 1994 meeting in Mona, Hawaii:
I wanna go back and I wanna say something very simple. If weโre going to trust each other, okay, and if Iโm assured that Iโm gonna get 67,000 tons by the yearโs end, weโre gonna sell it at the prices we agreed to . . . The only thing we need to talk about there because we are gonna get manipulated by these [expletive] buyersโthey can be smarter than us if we let them be smarter. . . . They [the customers] are not your friend. They are not my friend. And we gotta have โem, but they are not my friends. You are my friend. I wanna be closer to you than I am to any customer. Cause you can make us … money. … And all I wanna tell you again is letโsโletโs put the prices on the board. Letโs all agree thatโs what weโre gonna do and then walk out of here and do it.
The price of lysine doubled while the cartel was in effect. Confronted by the FBI tapes, Archer Daniels Midland pled guilty in 1996 and paid a fine of $100 million. A number of top executives, both at ADM and other firms, later paid fines of up to $350,000 and were sentenced to 24โ30 months in prison.
In another one of the FBI recordings, the president of Archer Daniels Midland told an executive from another competing firm that ADM had a slogan that, in his words, had โpenetrated the whole company.โ The company president stated the slogan this way: โOur competitors are our friends. Our customers are the enemy.โ That slogan could stand as the motto of cartels everywhere.
How to Enforce Cooperation
How can parties who find themselves in a prisonerโs dilemma situation avoid the undesired outcome and cooperate with each other? The way out of a prisonerโs dilemma is to find a way to penalize those who do not cooperate.
Perhaps the easiest approach for colluding oligopolists, as you might imagine, would be to sign a contract with each other that they will hold output low and keep prices high. If a group of U.S. companies signed such a contract, however, it would be illegal. Certain international organizations, like the nations that are members of the Organization of Petroleum Exporting Countries (OPEC) , have signed international agreements to act like a monopoly, hold down output, and keep prices high so that all of the countries can make high profits from oil exports. Such agreements, however, because they fall in a gray area of international law, are not legally enforceable. If Nigeria, for example, decides to start cutting prices and selling more oil, Saudi Arabia cannot sue Nigeria in court and force it to stop.
Visit the Organization of the Petroleum Exporting Countries website and learn more about its history and how it defines itself.
Because oligopolists cannot sign a legally enforceable contract to act like a monopoly, the firms may instead keep close tabs on what other firms are producing and charging. Alternatively, oligopolists may choose to act in a way that generates pressure on each firm to stick to its agreed quantity of output.
One example of the pressure these firms can exert on one another is the kinked demand curve , in which competing oligopoly firms commit to match price cuts, but not price increases. This situation is shown in Figure 1 . Say that an oligopoly airline has agreed with the rest of a cartel to provide a quantity of 10,000 seats on the New York to Los Angeles route, at a price of $500. This choice defines the kink in the firmโs perceived demand curve. The reason that the firm faces a kink in its demand curve is because of how the other oligopolists react to changes in the firmโs price. If the oligopoly decides to produce more and cut its price, the other members of the cartel will immediately match any price cutsโand therefore, a lower price brings very little increase in quantity sold.
If one firm cuts its price to $300, it will be able to sell only 11,000 seats. However, if the airline seeks to raise prices, the other oligopolists will not raise their prices, and so the firm that raised prices will lose a considerable share of sales. For example, if the firm raises its price to $550, its sales drop to 5,000 seats sold. Thus, if oligopolists always match price cuts by other firms in the cartel, but do not match price increases, then none of the oligopolists will have a strong incentive to change prices, since the potential gains are minimal. This strategy can work like a silent form of cooperation, in which the cartel successfully manages to hold down output, increase price , and share a monopoly level of profits even without any legally enforceable agreement.
Many real-world oligopolies, prodded by economic changes, legal and political pressures, and the egos of their top executives, go through episodes of cooperation and competition. If oligopolies could sustain cooperation with each other on output and pricing, they could earn profits as if they were a single monopoly. However, each firm in an oligopoly has an incentive to produce more and grab a bigger share of the overall market; when firms start behaving in this way, the market outcome in terms of prices and quantity can be similar to that of a highly competitive market.
Tradeoffs of Imperfect Competition
Monopolistic competition is probably the single most common market structure in the U.S. economy. It provides powerful incentives for innovation, as firms seek to earn profits in the short run, while entry assures that firms do not earn economic profits in the long run. However, monopolistically competitive firms do not produce at the lowest point on their average cost curves. In addition, the endless search to impress consumers through product differentiation may lead to excessive social expenses on advertising and marketing.
Oligopoly is probably the second most common market structure. When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost, they may provide considerable benefit to consumers. Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. Oligopolists also do not typically produce at the minimum of their average cost curves. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.
The task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers. Monopoly and Antitrust Policy discusses the delicate judgments that go into this task.
The Temptation to Defy the Law
Oligopolistic firms have been called โcats in a bag,โ as this chapter mentioned. The French detergent makers chose to โcozy upโ with each other. The result? An uneasy and tenuous relationship. When the Wall Street Journal reported on the matter, it wrote: โAccording to a statement a Henkel manager made to the [French anti-trust] commission, the detergent makers wanted โto limit the intensity of the competition between them and clean up the market.โ Nevertheless, by the early 1990s, a price war had broken out among them.โ During the soap executivesโ meetings, which sometimes lasted more than four hours, complex pricing structures were established. โOne [soap] executive recalled โchaoticโ meetings as each side tried to work out how the other had bent the rules.โ Like many cartels, the soap cartel disintegrated due to the very strong temptation for each member to maximize its own individual profits.
How did this soap opera end? After an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel, and Proctor & Gamble a total of โฌ361 million ($484 million). A similar fate befell the icemakers. Bagged ice is a commodity, a perfect substitute, generally sold in 7- or 22-pound bags. No one cares what label is on the bag. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model. After the agreements, each firm was the sole supplier of bagged ice to a region; there were profits in both the long run and the short run. According to the courts: โThese companies illegally conspired to manipulate the marketplace.โ Fines totaled about $600,000โa steep fine considering a bag of ice sells for under $3 in most parts of the United States.
Even though it is illegal in many parts of the world for firms to set prices and carve up a market, the temptation to earn higher profits makes it extremely tempting to defy the law.
Key Concepts and Summary
An oligopoly is a situation where a few firms sell most or all of the goods in a market. Oligopolists earn their highest profits if they can band together as a cartel and act like a monopolist by reducing output and raising price. Since each member of the oligopoly can benefit individually from expanding output, such collusion often breaks downโespecially since explicit collusion is illegal.
The prisonerโs dilemma is an example of game theory. It shows how, in certain situations, all sides can benefit from cooperative behavior rather than self-interested behavior. However, the challenge for the parties is to find ways to encourage cooperative behavior.
Self-Check Questions
- Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn?
- Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry?
- Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.
Review Questions
- Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.
- Does each individual in a prisonerโs dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.
- What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?
Critical Thinking Questions
- Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.
- When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long termโthat the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.
- Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. Table 6 represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisonerโs dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Rajโs earnings first, and Mary’s earnings second.)
The United States Department of Justice. โAntitrust Division.โ Accessed October 17, 2013. http://www.justice.gov/atr/.
eMarketer.com. 2014. โTotal US Ad Spending to See Largest Increase Since 2004: Mobile advertising leads growth; will surpass radio, magazines and newspapers this year. Accessed March 12, 2015. http://www.emarketer.com/Article/Total-US-Ad-Spending-See-Largest-Increase-Since-2004/1010982.
Federal Trade Commission. โAbout the Federal Trade Commission.โ Accessed October 17, 2013. http://www.ftc.gov/ftc/about.shtm.
Answers to Self-Check Questions
- Pc > Pcc. Qc < Qcc. Profit for the cartel is positive and large. Profit for cutthroat competition is zero.
- Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm Aโs profits will decline substantially, however, it is likely that Firm A will notice and if so, Firm A will cheat also, with the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns $1000. If Firm A cheats, assuming Firm B does not cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at least 50% of what it could have earned. The possibility of a small gain ($50) is probably not enough to induce Firm A to cheat, so in this case it is likely that both firms will collude.
Principles of Economics Copyright © 2016 by Rice University is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted.
- Economic Essays Grade 12
Grade 12 Economic Essays for the Next Three-Year Cycle (2021-2023)
- Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow)
Discuss in detail 'The new economic paradigm'/Explain the 'smoothing of cycles (Business Cycles)
Discuss in detail the features underpinning forecasting (Business Cycles)
Discuss in detail the main objectives of the public sector in the economy (Public Sector)
Discuss in detail the reason(s) for public sector failure (link them to typical problems experienced through public sector provisioning) (Public Sector)
Discuss in detail the reasons for international trade (Foreign Exchange Markets)
- Discuss in detail export promotion (Protectionism and FreeTrade)
Discuss in detail the arguments in favour of protectionism (Protectionism and Free Trade)
Discuss in detail the demand-side approach in promoting growth and development in South Africa (Growth and development)
Discuss in detail the following South African growth and development policies and strategic initiatives (Growth and development)
Discuss in detail South Africa's initiaties (endeavours) in regional development (Industrial Development Policies)
Discuss in detail the following economic indicators (Economic and Social Performance Indicators
Discuss in detail the following social indicators (Economic and Social Performance Indicators)
Discuss in detail the various equilibrium positions with the aid of graphs-PERFECT MARKET (Perfect Market)
- Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)
Examine the oligopoly in detail (Imperfect Market)
- Compare and contrast any TWO types of market structures ย
Discuss in detail how the following factors lead to the misallocation of resources in the market (Market Failures)
Discuss in detail state intervention as a consequence of market failures, with the aid of relevant graphs (Market Failures)
Discuss in detail the consequences of inflation (Inflation)
Discuss in detail the measures to combat demand-pull and/or cost-push inflation (Inflation)
Examine in detail the effects of tourism (Tourism)
Examine in detail the benefits of tourism (Tourism)
Discuss in detail how the government can ensure sustainable development (Environmental Sustainability)
- Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)
ESSAYS FOR THE NEXT THREE-YEAR CYCLE (2021-2023)
Macroeconomics- paper1.
Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow) INTRODUCTION The economy of a country is regarded as an open economy because of the presence of households, producers, government, foreign sector and financial sector as active participants in the economy. Markets link the participants in the economy ๐ธ๐ธย [Max 2]
BODY: MAIN PART PRODUCT / GOODS/ OUTPUT MARKET๐ธ
- These are the markets for consumer goods and services๐ธ๐ธ
- Goods are defined as tangible items, like food, clothes, cars, etc. that satisfies some human wants or needs๐ธ๐ธ
- Buying and selling of goods that are produced in markets e.g. ๐ธ๐ธ
- Capital Goods market for trading of buildings and machinery๐ธ๐ธ
- Consumer goods market for trading of durable consumer goods,ย semi-durable consumer goods and non-durable consumer goods. ๐ธ๐ธ
- Services are defined as non-tangible actions and include wholesale and retail, transport and financial markets. ๐ธ๐ธ
FACTOR / RESOURCE/ INPUT MARKETS๐ธ
- Households sell factors of production on the markets: rent for natural resources, wages for labour interest for capital and profit for entrepreneurship๐ธ๐ธ
- The factor market includes the labour, property and financial markets. ๐ธ๐ธ
- The market where services of factors of production are traded e.g. labour is hired and capital is borrowed โ these services earn wages, interest, rent and profits๐ธ๐ธ
FINANCIAL MARKETS๐ธ
- They are not directly involved in the production of good and services, butย act as a link between households , the business sector and other participants with surplus finds๐ธ๐ธ
- E.g. banks, insurance companies and pension funds๐ธ
MONEY MARKETS๐ธ
- In the money markets short term loans, and very short term funds are saved and borrowed by consumers and business enterprises ๐ธ๐ธ
- Products sold in the market are bank debentures, treasury bills and government bonds ๐ธ๐ธ
- The simplest form exists when parties make demand and short-term deposits and borrow on short term ๐ธ๐ธ
- The SARB is the key institution in the money market๐ธ๐ธ
CAPITAL MARKETS๐ธ
- In the capital markets long term funds are borrowed and saved by consumers and the business sector๐ธ๐ธ
- The Johannesburg Security Exchange (JSE) is a key institution in the capital ๐ธ๐ธ
- Products sold in this market are mortgage bonds and shares๐ธ๐ธ
FOREIGN EXCHANGE MARKETS๐ธ
- On the foreign exchange markets businesses buy/ sell foreign currency to pay for imported goods and services๐ธ๐ธ
- These transactions occur in banks and consists of electronic money transfers from one account to another๐ธ๐ธ
- The leading centres/ most important foreign exchange markets are in London, New York and Tokyo ๐ธ๐ธ
- e.g. travellerโs cheques to travel abroad๐ธ
- Flows of private and public goods and services are real flows and they are accompanied by counter flows of expenditure and taxes on the product market๐ธ๐ธ
- Factor services are real flows and they are accompanied by counter flows of income on the factor market๐ธ๐ธ
- Imports and exports are real flows and are accompanied by counter flows of expenditure and revenue on the foreign exchange market๐ธ๐ธ[Max 26]
- A change in investment of R 10m will result in a change in income of R 20m๐ธ๐ธ
- An increase in investment causes the expenditure function to shift upwardsย from C1 to C2 so that C1 is parallel to C2๐ธ๐ธ
- The effect of the increase in investment is that the total expenditure will increase from R 20m to R 30m๐ธ๐ธ
- The increase in the value of output (Y) is greater than the increase in the expenditure (E) ๐ธ๐ธ (Explanation must comply with the figures supplied in the graphicalย presentation) [Max 4] [Max 10]
CONCLUSION The circular flow ensures continued interdependence and coordination of the economic activities in the economy / markets are critically important institutions in our economic system, because they regulate the supply and demand and safeguard price stability and general business confidence. ๐ธ๐ธ [Any other relevant conclusion] [Max 2]
INTRODUCTION The new economic paradigm in terms of the smoothing of business cycles discourages monetary policy makers from using monetary and fiscal policies to fine tune the economy but rather encourages achieving stability through sound long term decisions relating to demand and supply in the economy/smoothing out the painful part of economic down-fall that is part of the market economy๐ธ๐ธ (Accept other relevant definition/description of smoothing/new economic paradigm). [Max 2]
BODY: MAIN PART The new economic paradigm is embedded in the demand and supply side policies. ๐ธ๐ธ
Demand-side policies
- It focuses on aggregate demand in the economy๐ธ๐ธ
- When households, firms and the government spend more, demand in the economy increases. ๐ธ๐ธ
- This makes the economy grow but lead to inflation.๐ธ๐ธ
- Aggregate demand increases more quickly than aggregate supply and this causes price increases. ๐ธ๐ธ
- If the supply does not react to the increase in demand, prices will increase. ๐ธ๐ธ
- This will lead to inflation (a sustained and considerable in the general price level) ๐ธ๐ธ
Unemployment:
- Demand-side policies are effective in stimulating economic growth. ๐ธ๐ธ
- Economic growth can lead to an increase in demand for labour. ๐ธ๐ธ
- As a result more people will be employed and unemployment will increase. ๐ธ๐ธ
- As unemployment decreases inflation is likely to increase. ๐ธ๐ธ
- This relationship between unemployment and inflation is illustrated in the Phillips curve. ๐ธ๐ธ
- The PC curve shows the initial situation. A is the point of intersection of the PC curve with the x- axis. It shows the natural rate of unemployment, for instance 14%๐ธ๐ธ
- At point A inflation rate is zero. ๐ธ๐ธ
- If unemployment falls to C for instance, 8%, inflation caused by wage increases is at 6%.๐ธ๐ธ
- If unemployment increases from C to B to A, inflation falls from 6% to 2% to 0%.๐ธ๐ธ
Supply-side policies Reduction of costs ๐ธ
- Infrastructural services: reasonable charge and efficient transport, communication, water
- services and energy supply. ๐ธ๐ธ
- Administrative costs: these costs include inspection, reports on applications
- of various laws, regulations and by-laws, tax returns and returns providing statistical
- information.
- It adds to costs and businesses carry a heavy burden ๐ธ๐ธ
- Cash incentives: it includes subsidies for businesses to locate in neglected areas where unemployment is high and compensation to exporters for certain costs they
- incurred in development of export markets. ๐ธ๐ธ
Improving the efficiency of inputs ๐ธ
- Tax rates: low tax rates can serve as an incentive to workers. It will improve the productivity and output. ๐ธ๐ธ
- Capital consumption: replacing capital goods regularly creates opportunities for businesses to keep up with technological development and better outputs๐ธ๐ธ
- Human resource development: to improve the quality of manpower by improving health care, education and training. ๐ธ๐ธ
- Free advisory service: these promote opportunities to export. ๐ธ๐ธ
Improving the efficiency of markets ๐ธ
- Deregulation: removal of laws, regulations and by-laws and other forms of government controls makes the market free. ๐ธ๐ธ
- Competition: encourages the establishment of new businesses ๐ธ๐ธ
- Levelling the play field: private businesses cannot compete with public enterprises ๐ธ๐ธ Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per heading or sub-heading to a maximum of 8 marks. (8 x 1) (8) [Max 26]
Explanation: The above graph shows:
- Aggregate demand (AD) and aggregate supply (AS) are in equilibrium at point C. ๐ธ๐ธ
- If aggregate demand is stimulated so that it moves to AD1 and aggregate supply responds promptly and relocates at AS1; a larger real output becomes available without any price increases. ๐ธ๐ธ
- Supply is often sticky and fixed in the short term. ๐ธ๐ธ
- Therefore, if aggregate demand increases to AD1 and aggregate supply does not respond, intersection is at point F. Real production increases but so does the price, in other words, with more inflation. ๐ธ๐ธ
- The aggregate demand locates at any position to the left of AS1 inflation prevails. ๐ธ๐ธ
- The solution is to create conditions that ensure supply is more flexible. ๐ธ๐ธ
- If the cost of increasing production is completely flexible, a great real outputย can be supplied at any given price level. ๐ธ๐ธ [Max 10]
CONCLUSION It is clear from the discussion above that it is critically important to manage the aggregate supply and demand to ensure stability in the economy. ๐ธ๐ธ [Accept any relevant higher order conclusion] [Max 2]
INTRODUCTION Accurate prediction is not possible in Economics. The best the economists can do is to try and forecast what might happen. There are a number of techniques available to help economists to forecast business cycles, e.g. economic indicators ๐ธ๐ธ OR Successive periods of contraction and expansion of economic activities ๐ธ๐ธ [Accept any other relevant introduction] [Max 2]
BODY: MAIN PART Business cycle indicators Leading economic indicators ๐ธ
- These are indicators that change before the economy changes / coincide with the reference turning point ๐ธ๐ธ
- They give consumers, business leaders and policy makers a glimpse (advance warnings) of where the economy might be heading. ๐ธ๐ธ
- Peak before a peak in aggregate economic activity is reached.
- Most important type of indicator in helping economists to predict what the economy will be like in the future ๐ธ๐ธ
- When these indicators rise, the level of economic activities will also rise in a few months' time/an upswing ๐ธ๐ธ
- E.g. job advertising space/inventory/sales ratio๐ธ
Coincident economic indicators๐ธ
- They move at the same time as the economy / if the turning point of a specific time series variable coincides with the reference turning point๐ธ๐ธ
- It indicates the actual state of the economy๐ธ๐ธ
- E.g. value of retail sales. ๐ธ
- If the business cycle reaches a peak and then begins to decline, the value of retail sales will reach a peak and then begin to decline at same time๐ธ๐ธ
Lagging economic indicators๐ธ
- ย They do not change direction until after the business cycle has changed its direction๐ธ๐ธ
- They serve to confirm the behaviour of co-incident indicators๐ธ๐ธ
- E.g. the value of wholesalers' sales of machinery๐ธ
- If the business cycle reaches a peak and begins to decline, we are able to predict the value of new machinery sold๐ธ๐ธ
Composite indicator๐ธ
- It is a summary of the various indicators of the same type into a single value๐ธ๐ธ
- Their values are consolidated into a single value , if this is done we find a value of a composite leading , coincident and lagging indicator๐ธ๐ธ Accept ONE example from the table below:
- This is the time that it takes for a business cycle to move through one complete cycle (measured from peak to peak) ๐ธ๐ธ
- It is useful to know the length because the length tends to remain relatively constant over time.๐ธ๐ธ
- If a business cycle has the length of 10 years it can be predicted that 10 years will pass between successive peaks or troughs in the economy. ๐ธ๐ธ
- Longer cycles show strength. ๐ธ๐ธ
- Cycles can overshoot. ๐ธ๐ธ
Ways to measure lengths:
- Crisis to crisis ๐ธ๐ธ
- Historical records ๐ธ๐ธ
- Consensus on businesses experience ๐ธ๐ธ
Amplitude ๐ธ
- It is the difference between the total output between a peak and a trough. ๐ธ๐ธ
- It measures the distance of the oscillation of a variable from the trend line / It is the intensity (height) of the upswing and downswing (contraction and expansion) in economic activity ๐ธ๐ธ
- A large amplitude during an upswing indicates strong underlying forces โ which result in longer cycles ๐ธ๐ธ
- ย The larger the amplitude the more extreme the changes that may occur / extent of change ๐ธ๐ธ
- E.g. During the upswing inflation may increase from 5% to 10%. (100% increase) ๐ธ๐ธ
- ย A trend is the movement of the economy in a general direction. ๐ธ๐ธ
- It usually has a positive slope because the production capacity of the economy increases over time ๐ธ๐ธ
- Also known as the long term growth potential of the economy. ๐ธ๐ธ
- The diagram above illustrates an economy which is growing โ thus an upward trend (positive slope) ๐ธ๐ธ
- Trends are useful because they indicate the general direction in which the economy is moving โ it indicates the rate of increase or decrease in the level of output๐ธ๐ธ
Extrapolation ๐ธ
- Forecasters use past data e.g. trends and by assuming that this trend will continue, they make predictions about the future๐ธ๐ธ
- Means to estimate something unknown from facts or information that are known ๐ธ๐ธ
- if it becomes clear that the business cycle has passed through a trough and has entered a boom phase, forecasters might predict that the economy will grow in the months that follow ๐ธ๐ธ
- It is also used to make economic predictions in other settings e.g. prediction of future share prices๐ธ๐ธ
Moving average ๐ธ
- It is a statistical analytical tool that is used to analyse the changes that occur in a series of data over a certain period of time / repeatedly calculating a series of different average values along a time series to produce a smooth curve ๐ธ๐ธ
- The moving average could be calculated for the past three months in order to smooth out any minor fluctuations ๐ธ๐ธ
- It is calculated to iron out (minimize) small fluctuations and reveal long-term trends in the business cycle๐ธ๐ธ Answers must be in full sentences and well described with examples to be able to obtain 2 marks per fact. Learners should be awarded 1 mark per 8 headings and examples. [8 x 1=8] [Max 26]
BODY: ADDITIONAL PART
- An expansionary monetary policy is implemented when the economy is in recession in order to stimulate economic activities. ๐ธ๐ธ
- Interest rates can be reduced to encourage spending. ๐ธ๐ธ
- Households and firms can borrow more and spend more. ๐ธ๐ธ
- ย The increased spending increases the level of economic activity. ๐ธ๐ธ
- Investment will increase and more factors of production will be employed. ๐ธ๐ธ
- Higher levels of production, income and expenditure will be achieved. ๐ธ๐ธ
- If the supply of goods and services does not increase in line with an increase in demand, inflation will increase. ๐ธ๐ธ
- Inflation can be curbed by reducing money supply and availability of credit. ๐ธ๐ธ
- To dampen demand at the peak the government will be able to reduce the money supply by increasing interest rates. ๐ธ๐ธ
- Selling government bonds and securities (open market transactions) and reduce the supply of money in circulation. ๐ธ๐ธ
- Increase the cash reserve requirements to manipulate money creation activities of banks. ๐ธ๐ธ
- Persuade banks to decrease lending (moral suasion) ๐ธ๐ธ
- To devaluate the exchange rate (exchange rate policy) ๐ธ๐ธ [Max 10]
CONCLUSION It remain clear that business cycles must be clearly monitored through the indicators available, policy makers must act quickly by using monetary and fiscal instruments in order to prevent instability in the economy. ๐ธ๐ธ [Accept any other relevant conclusion] [Max 2]
INTRODUCTION: The government provides goods and services that are under supplied by the market and therefore plays a major role in regulating economic activity and guiding and shaping theย economy. ๐ธ๐ธ [Max 2]
BODY: MAIN PART Objectives:
Economic growth ๐ธ
- Refer to an increase in the production of goods and services ๐ธ๐ธ
- Measured in terms of Real GDP ๐ธ๐ธ
- For economic growth to occur, the economic growth rate must be higher than Population growth ๐ธ๐ธ
- Growth and development in a country benefit its citizens because it often leads to a higher standard of living ๐ธ๐ธ
Full employment ๐ธ
- It is when all the people who want to work, who are looking for a job must be able to get a job ๐ธ๐ธ
- High levels of employment is the most important economic objective of the government ๐ธ๐ธ
- The unemployment rate increased over the past few years ๐ธ๐ธ
- Informal sector activities must be promoted because it is an area where employment increase ๐ธ๐ธ
Exchange rate stability ๐ธ
- The economy must be manage effectively and effective Fiscal and monetary policy must be used to keep the exchange rate relatively stable ๐ธ๐ธ
- Depreciation and Appreciation of the currency create uncertainties for producers and traders and should be limited. These uncertainties must be limited ๐ธ๐ธ
- The SARB changed the Exchange rate from a Managed floating to a free floating exchange rate ๐ธ๐ธ
Price stability ๐ธ
- Stable price causes better results in terms of job creation and economic growth ๐ธ๐ธ
- The SARB inflation target is 3% - 6% and they are successful in keeping inflation within this target ๐ธ๐ธ
- Interest Rates, based on the Repo Rate are the main instruments used in the stabilisation policy ๐ธ๐ธ
- The stable budget deficit also has a stabilizing effect on the inflation rate ๐ธ๐ธ
Economic equity ๐ธ
- Redistribution of income and wealth is essential ๐ธ๐ธ
- South Africa uses a progressive income tax system โ taxation on profits, taxation on wealth, capital gains tax and taxation on spending, are used to finance free services ๐ธ๐ธ
- Free social services are basic education; primary health and to finance basic economic services ๐ธ๐ธ
- E.g. Cash Grant to the poor, e.g. child grants and cash grants to vulnerable people, e.g. disability grants ๐ธ
- Progressive taxation means that the higher income earners pay higher/more taxation ๐ธ๐ธ [Max 26]
- Learner responses can be positive or negative.
- Follow the argument and see if the learner can produce enough evidence to support his/her answer.
Economic Growth:
- SA targets 4โ5% economic growth. Previously SA had a 5% growth rate ๐ธ๐ธ
- In recent years the growth rate decreased steadily (presently below 3%) ๐ธ๐ธ
Full Employment:
- Compared to foreign countries unemployment is very high. (Expanded โ over 30%) ๐ธ๐ธ
- Efforts by SA government to reduce these figures includes the GEAR strategy, focus on small business enterprises, Public Works Programme ๐ธ๐ธ
Exchange rate stability:
- SA now operates on a free floating exchange rate system in line with international benchmarks ๐ธ๐ธ
- Unfortunately our currency has lost its value, with a general trend of depreciation over the last few years ๐ธ๐ธ
Price stability:
- For the past few years South Africa has managed to remain within the 3โ6% target ๐ธ๐ธ
- The current increase in the repo rate has put constraints on the inflation rate ๐ธ๐ธ
Economic equity:
- Economic equity has improved (BEE, affirmative action, gender equity) and led to an improvement in economic equity ๐ธ๐ธ [Any 5 x 2] [Max 10]
CONCLUSION: While some successes have been achieved by government, the fulfilling of some of the objectives are compromised by factors like lack of accountability, corruption, budgeting, nepotism and incompetence. ๐ธ๐ธ [Any relevant conclusion] [Max 2]
INTRODUCTION The government responds to market failures by establishing and maintaining state owned enterprises to provide public goods and services ๐ธ๐ธ [Any other relevant introduction] [Max 2]
BODY: MAIN PART
- It is required to give an explanation of one's decisions, actions and expenditures over a period of time ๐ธ๐ธ
- There are mechanisms for evaluating government's economic and financial performance ๐ธ๐ธ
- That the desired quantities and quality of goods and services for which taxes are raised are delivered ๐ธ๐ธ
- That monopolies, corruption, nepotism, incompetence and apathy does not occur ๐ธ๐ธ
- Two important elements of accountability is participation and transparency๐ธ๐ธ
- Ministerial responsibilities, i.e. the ministers of government departments are responsible for decisions and actions and expenditures ๐ธ๐ธ
- Parliamentary questioning arises and members of the government departments have to respond ๐ธ๐ธ
- The national treasury is responsible for treasury control ๐ธ๐ธ
- The auditor-general reports annually in writing on each government department๐ธ๐ธ
- Public goods are efficiently provided if Pareto efficiency is achieved ๐ธ๐ธ
- That is if resources are allocated in such a way that no one can be made better off without making someone else worse off ๐ธ๐ธ
- Bureaucracy the official rules and procedures. ๐ธ๐ธ/insensitivity to the needs of their clients ๐ธ๐ธ
- Incompetence- the lack of skill or ability to do a task successfully๐ธ๐ธ/May have improper qualifications/or an attitude of apathy ๐ธ๐ธ
- Corruption- the exploitation of a person's position for private gain /taking bribes, committing fraud, nepotism ๐ธ๐ธ
- State-owned enterprises do not operate according to the forces of supply and demand ๐ธ๐ธ
- It becomes thus very difficult for state-owned enterprises to assess needs and they are thus prone to under- or over-supplying public goods and services ๐ธ๐ธ
- The census and other household surveys as well as local government structures provide this type of information ๐ธ๐ธ
- Since resources are scarce, government must then decide which needs and whose needs are to be satisfied ๐ธ๐ธ
- In the private sector houses are built according to the price that people are able and willing to pay ๐ธ๐ธ
- In the public sector housing is regarded as a social responsibility and authorities supply them according to the needs of people ๐ธ๐ธ
- In a market economy prices are determined by supply and demand ๐ธ๐ธ
- The objectives of firms are to maximise their profits and they usually set prices to achieve this objective ๐ธ๐ธ
- Government does not pursue the profit maximisation objective ๐ธ๐ธ
- Government takes into account certain social, economic, political and environmental conditions as well as public opinion ๐ธ๐ธ
- Free-of-charge services- this is met from taxes ๐ธ๐ธ and applies to most community goods and collective goods ๐ธ๐ธ (e.g.) defence, police whereby charges and toll fees are levied ๐ธ
- User-charges ๐ธ option to charge depends on technical reasons ๐ธ๐ธ (e.g.) cost of providing a double lane road could be recovered by toll charges ๐ธ Economic reasons ๐ธ such as services like water and electricity ๐ธ that have a zero price ๐ธ political reasons ๐ธ where income distribution is significantly unequal, administrative rationing according to need takes place ๐ธ๐ธ (e.g.) public health and education ๐ธ
- Direct and indirect subsidies direct subsidies are used to cover part of the costs ๐ธ๐ธ (e.g.) urban bus service ๐ธ and an indirect subsidy is used to write off accumulated losses or deficits ๐ธ๐ธ
- Standing charges -called availability charges ๐ธ๐ธ (e.g.) water and electricity ๐ธ standing charges goes to meet fixed costs and the price per unit consumed covers variable costs ๐ธ๐ธ
- Price discrimination - different users have different elastic ties of demand for a good ๐ธ๐ธ (e.g.) commercial and manufacturing businesses pay higher rates than households and they pay on a sliding scale๐ธ๐ธ
- State-owned enterprises that either render a service or when an existing enterprise is nationalised ๐ธ๐ธ
- They focus on making a profit and maximizing cost at the expense of the needs of some groups ๐ธ๐ธ (e.g.) Iscor ๐ธ SABC, ๐ธSAA, Spoornet ๐ธ
- refers to the process whereby state-owned enterprises and state-owned assets are handed over or sold to private individuals ๐ธ๐ธ
- cost of maintaining and managing state-owned enterprises are high which can lead to higher taxes and larger public debt ๐ธ๐ธ
- State-owned enterprises are not run as efficiently as private enterprises ๐ธ๐ธ
- Nationalisation is the process whereby the state takes control and ownership of privately owned assets and private enterprises ๐ธ๐ธ
- It includes contracting of services, public-private partnerships, increasing competitiveness๐ธ๐ธ [Max 26]
ADDITIONAL PART Possible problems in your community or elsewhere
- Lack of drinking water due to burst pipes ๐ธ๐ธ
- Lack of electricity due to lack of infrastructure (load shedding) ๐ธ๐ธ
- Lack of schooling โ no buildings available โ lack of maintenance ๐ธ๐ธ
- Lack of health services due to lack of staff, infrastructure, strikes ๐ธ๐ธ
- Lack of adequate housing (RDP) ๐ธ๐ธ [Max 10 marks - List of examples max 5 marks] [Accept any other relevant answer]ย
CONCLUSION If the above problems are not dealt with timeously by government, government will continue to fail its people in terms of service delivery, seeing many protests occurring regularly ๐ธ๐ธ [Any other relevant higher order conclusion] [Max 2]
INTRODUCTION International trade can be defined as the exchange of goods and services between countries globally. ๐ธ๐ธ These trade agreements are negotiated by protocols and agreement due to the uneven distribution of natural resources globally. ๐ธ๐ธ
BODY-MAIN PART The main reasons for international trade.
Demand reasons The size of the population impacts demand.
- If there is an increase in population growth, it causes an increase in demand, as more peopleโs needs must be satisfied. ๐ธ๐ธ
- Local suppliers may not be able to satisfy this demand. ๐ธ๐ธ
The populationโs income levels effect demand.
- Changes in income cause a change in the demand for goods and services. ๐ธ๐ธ โข An increase in the per capita income of people in more disposable income that can be spent on local goods and services, some of which may then have to be imported. ๐ธ๐ธ
An increase in the wealth of the population leads to greater demand for goods.
- People have access to loans and can spend more on luxury goods, many of which are produced in other countries. ๐ธ๐ธ
Preferences and tastes can play a part in the determining of prices,
- ย E.g. customers in Australia have a preference for a specific product which they do not produce and need to import and it will have a higher value than in other countries. ๐ธ๐ธ
The difference in consumption patterns is determined
- By the level of economic development in the country, e.g. a poorly developed country will have a high demand for basic goods and services but a lower demand for luxury goods. ๐ธ๐ธ
Supply reasons Natural resources are not evenly distributed
- Across all countries of the world. ๐ธ๐ธ
- They vary from country to country and can only be exploited in places where these resources exist. ๐ธ๐ธ
Climatic conditions
- Make it possible for some countries to produce certain goods at a lower price than other countries, e.g. Brazil is the biggest producer of coffee. ๐ธ๐ธ
Labour resources
- Differ in quantity, quality and cost between countries. ๐ธ๐ธ
- Some countries have highly skilled, well-paid workers with high productivity levels, e.g. Switzerland. ๐ธ๐ธ
Technological resources
- ย Are available in some countries that enable them to produce certain goods and services at a low unit cost, e.g. Japan. ๐ธ๐ธ
Specialisation in the production
- Certain goods and services allows some countries to produce them at a lower cost than others,ย e.g. Japan produces electronic goods and sells these at a lower price. ๐ธ๐ธ
Capital allows developed countries
- Enjoy an advantage over underdeveloped countries. ๐ธ๐ธ
- Due to a lack of capital, some countries cannot produce all the goods they require themselves. ๐ธ๐ธ
ADDITIONAL PART
- Buying and selling goods and services from other countries: ๐ธ๐ธ
- The purchase of goods and services from abroad that leads to an outflow of currency from SA- Imports (M). ๐ธ๐ธ
- The of goods and services to buyers from other countries leading to an inflow of currency to SAย โ Exports (X) ๐ธ๐ธ
- Different factor endowments mean some countries can produce goods and services more efficiently than others- specialisation is therefore possible: ๐ธ๐ธ
Absolute Advantage:
- Where one country can produce goods with fewer resources than other. ๐ธ๐ธ
Comparative Advantage:
- Where one country can produce goods at a lower opportunity cost it sacrifices less resources in production. ๐ธ๐ธ
CONCLUSION International trade is important of countries to survive economically, as barriers to trade would disadvantage all countries, due to their interdependency globally. ๐ธ๐ธ [Any other relevant higher order conclusion] [Max 2]
ECONOMIC PURSUITS-PAPER 1
Discuss in detail export promotion (Protectionism and Free Trade)
INTRODUCTION Export promotion refers to measures taken by governments increase production of goods and services that can be exported. The government provides incentives to encourage production ๐ธ๐ธ [Max 2]
BODY: MAIN PART REASONS:
- Export promotion measures lower cost of production which makes it easier to compete on the international market ๐ธ๐ธ
- Achieve significant export-led economic growth๐ธ๐ธ
- Export enlarges production capacity of country because more and larger manufacturing industries are established. ๐ธ๐ธ
- The first step to export-led economic growth is to implement policies that encourage the establishment of industries to produce goods and services for export markets๐ธ๐ธ
METHODS: Exports are promoted through: Incentives๐ธ
- Export incentives include information on export markets, researchย with regard to new markets, concessions on transport charges, export credit and export credit guarantees and publicity commending successful exporters๐ธ๐ธ
- This will encourage manufacturers to export an increased volume of their production๐ธ๐ธ
- Trade missions help to market SA products abroad๐ธ๐ธand supply SA companies with information about potential markets ๐ธ๐ธ
Direct Subsidies๐ธ
- Described as direct because it involves government expenditure. ๐ธ๐ธ
- Include cash payments to exporters, refunds on import tariffs and employment subsidies.
- The aim is to increase the competitiveness of exporting company๐ธ๐ธ reduce cost of production๐ธ๐ธand explore and establish overseas markets๐ธ๐ธ
Indirect subsidies
- Regarded as indirect because it results in the government receiving less revenue๐ธ๐ธ e.g. general tax rebates,
- Tax concessions on profits earned from exports or on capital invested to produce export goods, refunding
- ย Of certain taxes e.g. custom duties on imported goods used in the manufacturing process๐ธ๐ธ
- Allows companies to lower their prices and enables them to compete in international markets๐ธ๐ธ
- Challenge for governments to design incentives and subsidies in such a way that prices of export goods can't be viewed as dumping prices๐ธ๐ธ
Trade neutrality ๐ธ
- Can be achieved if incentives in favour of export production are introduced
- Up to point that neutralises the impact of protectionist measures in place๐ธ๐ธ
- E.g. subsidies equal to magnitude of import duties can be paid๐ธ
Export processing zones (EPZs) ๐ธ
- Is free-trade enclave within a protected area โ
- Is fenced and controlled industrial park that falls outside
- Domestic customs area, and usually located near harbour or airport ๐ธ๐ธ NOTE : For the response with regard to the effectiveness of export promotion methods, a maximum of 5 marks can be allocated.
- No limitations on size and scale since world market is very large๐ธ๐ธ
- Cost and efficiency of production based on this and organised along lines of comparative advantage๐ธ๐ธ
- Increased domestic production will expand exports to permit more imports and may result in backward linkage effects that stimulate domestic production in related industries๐ธ๐ธ
- Exchange rates are realistic and there is no need for exchange control and quantitative restrictions๐ธ๐ธ
- Value can be added to natural resources of the country ๐ธ๐ธ
- Creates employment opportunities ๐ธ๐ธ
- Increase in exports has positive effect on balance of payments ๐ธ๐ธ
- Increase in production leads to lower domestic prices, which benefit local consumers๐ธ๐ธ
DISADVANTAGES
- Real cost of production ๐ธ subsidies and incentives reduce total cost of production which must be met from sales๐ธ๐ธ real cost is thus concealed by subsidies๐ธ๐ธproducts cannot compete in open market ๐ธ๐ธ
- Lack of competition ๐ธ businesses charge prices that are so low that they force competitors out of the market ๐ธ๐ธ
- Increased tariffs and quotas ๐ธcan be against spirit of provisions of WTO๐ธ๐ธoverseas competitors retaliate with tariffs and quotas๐ธ๐ธ goods are sold domestically below their real cost of production (export subsidies and dumping) ๐ธ๐ธ
- Protection of labour-intensive industries ๐ธ developed countries maintain high levels of effective protection for their industries that produce labour-intensive goods in which developing countries already have or can achieve comparative advantage ๐ธ๐ธ
- Withdrawal of incentives often leads to closure of effected companies. ๐ธ๐ธ
- Incentives often lead to inefficiencies in the production process, since companies don't have to do their best to compete๐ธ๐ธ
- Can be seen as dumping ๐ธ๐ธ [Max 26]
BODY: ADDITIONAL PART How successful is South Africa in protecting the local textile industry against foreign competition?
- Not successful: ๐ธ Many domestic textile manufacturers closed down due to unfair international competition ๐ธ๐ธ Many wholesalers make use of suppliers from abroad ๐ธ๐ธ e.g. Woolworths/Walmart๐ธ
- Dumping still occurs โ European manufacturers still dump clothing in Africa out of season at prices below cost ๐ธ๐ธ Job losses due to a lack of protection in this industry ๐ธ๐ธ [Accept any motivation relating to success indicators] [Max 10]
CONCLUSION South Africa's international trade policy facilitates globalisation thereby impacting positively on the balance of payment. ๐ธ๐ธ [Accept any other relevant conclusion] [Max 2]
INTRODUCTION Protectionism refers to a deliberate policy on the part of the government to erect trade barriers, such as tariffs and quotas, in order to protect domestic industries against internationalย competition. ๐ธ๐ธ [Accept any other relevant definition] [Max 2]
BODY-MAIN PART Raising revenue for the government
- Import tariffs raise revenue for the government. ๐ธ๐ธ
- In smaller countries the tax base is often small due to low incomes of individuals and businesses. ๐ธ๐ธ
- Low incomes do not provide much in the form of income taxes and therefore custom duties on imports is a significant source of income or revenue. ๐ธ๐ธ
Protecting the whole industrial base
- Maintaining domestic employment. ๐ธ๐ธ
- Countries with high unemployment are continuously pressured to stimulate employment creation and therefore resort to protectionism in order to stimulate industrialisation. ๐ธ๐ธ
- It is thought that using protectionism the countryโs citizens would purchase more domestic products and raise domestic employment. ๐ธ๐ธ
- These measures on domestic employment creation at the expense of other countries, led to such measures as โbeggar-my-neighbourโ policies. ๐ธ๐ธ
- Applying import policies is likely to reduce other countries ability to buy countryโs exports and may provoke retaliation. ๐ธ๐ธ
Protecting workers
- It is argued that imports from other countries with relatively low wages represent unfair competition and threaten the standard of living of the more highly paid workers of the local industries. ๐ธ๐ธ
- Local industries would therefore be unable to compete because of higher wages pushing up the price levels of goods. ๐ธ๐ธ
- Protection is thus necessary to prevent local wage levels from falling or even to prevent local businesses from closing down due to becoming unprofitable. ๐ธ๐ธ
- Competition from low-wage countries may also reflect the fact that those countries have a comparative advantage in low-skilled labour-intensive industries. ๐ธ๐ธ
Diversifying the industrial base
- Overtime countries need to develop diversified industries to prevent overspecialisation. ๐ธ๐ธ
- A country relying too heavily on the export of one or a few products is very vulnerable. ๐ธ๐ธ
- If a developing countryโs employment and income is dependent on only one or two industries, there is the risk that world fluctuations in prices and demand and supply-side problems could results in significant fluctuations in domestic economic activity. ๐ธ๐ธ
- Import restrictions may be imposed on a range of products in order to ensure that a number of domestic industries develop. ๐ธ๐ธ
Develop strategic industries
- Some industries such as the iron-ore and steel, agriculture, (basic foodstuffs, such as maize), energy (fuels) and electronics (communication) among others, are regarded as strategic industries. ๐ธ๐ธ
- Developing countries may feel that they need to develop these industries in order to become self-sufficient . ๐ธ๐ธ
Protecting specific industries Dumping
- Foreign industries may engage in dumping because government subsidies permit them to sell at very low prices or because they are seeking to raise profits through price discrimination. ๐ธ๐ธ
- The reason for selling products at lower prices may be to dispose of accumulate stocks Of the goods and as a result consumers in the importing country stand to benefit however,
- Their long term objective may be to drive out domestic producers and gain control of the market and consumers
- Are likely to lose out in the reduction in choice and higher prices that the exporters will be able to charge. ๐ธ๐ธ
Infant industries
- Usually newly established and find it difficult to survive due to their average costs being higher than that of their well-established foreign competitors. ๐ธ๐ธ
- However, if they are given protection in their early years they may be able to grow and Thereby take advantage lower their average costs and become competitive and at this point protection can be removed. ๐ธ๐ธ
Declining industries/sunset industries
- Structural changes in the demand and supply of a good may severely hit an industry such industries should be permitted to go out of business gradually declining industries
- Are likely to be industries that no longer have a comparative advantage and however, if they go out of business quickly there may be a sudden and large increase in unemployment. ๐ธ๐ธ
- Protection may enable an industry to decline gradually thereby allowing time for resources including labour to move to other industries. ๐ธ๐ธ
- Protecting domestic standards domestic regulations of food safety human rights and environmental standards have been increasingly acting as trade restrictions. ๐ธ๐ธ [Accept any other relevant fact] [Max 26]
ADDITIONAL PART South Africa promotes exports through subsidies
Direct Subsidies
- Strict screening measures should be put in place when companies apply for financial assistance. Government expenditure can provide direct financial support to domestic producers for their exports e.g. ๐ธ๐ธ
- Cash grants offered to South African exhibitors to exhibit their products at exhibitions overseas. To explore new markets. ๐ธ๐ธ
- Foreign trade missions to explore new markets imposition of tariffs on imports. ๐ธ๐ธ
- Funds for the formation of formal export councils. ๐ธ๐ธ
- Subsidies for training or employing personnel. ๐ธ๐ธ
- Funds for the export market research. ๐ธ๐ธ
- Product registration and foreign patent registrations. ๐ธ๐ธ
- Government can refund companies certain taxes to promote exports.
- These types of indirect subsidies are:
- General tax rebates (Part of the cost of production can be subtracted from the tax that has been paid) ๐ธ๐ธ
- Tax concessions on profits earned from exports or on capital invested to produce export goods. ๐ธ๐ธ
- Refunds on import tariffs in the manufacturing process of exported goods companies often use custom duties are paid on these goods and the government refunds them. ๐ธ๐ธ [Max 10]
CONCLUSION Most countries agree that protectionism is harmful to the economy if not well managed. Protectionism is needed especially where industries are young and need expansion or development. ๐ธ๐ธ [Any other relevant higher order conclusion] [Max 2]
INTRODUCTION Economic growth is responsible for the overall growth of the economy, in order to enhance the well being of the economy as a whole. Whereas economic development would focus on the individual well being of the citizens of a country. [Any other relevant higher order conclusion] [Max 2]
BODY-MAIN PART Growth and Development A demand-side approach includes discretionary changes in monetary and fiscal policies with the aim of changing the level of aggregate demand. ๐ธ๐ธ
Monetary policy
- Is driven by the South African Reserve Bank (SARB). ๐ธ๐ธ
- It aims to stabilise prices by managing inflation. ๐ธ๐ธ
Fiscal policy
- Is driven by the Department of Finance. ๐ธ๐ธ
- It aims to facilitate government, political and economic objectives. ๐ธ๐ธ
- A demand-side approach to economic growth and development does not only depend on fiscal and monetary policy. ๐ธ๐ธ
- It is dependent on all components of aggregate demand, that is, C, I, X and G. ๐ธ๐ธ
South African approach
- The South African approach uses both monetary and fiscal measures to influence aggregate demand in the economy. ๐ธ๐ธ
- The South African Reserve Bank (SARB) as the central bank in South Africa formulates the monetary policy. ๐ธ๐ธ
- They use the following instruments:
Interest rate changes
- It is used to influence credit creation by making credit more expensive or cheaper. ๐ธ๐ธ
- The exchange rate is stabilised by encouraging inflow or outflows. ๐ธ๐ธ
Open market transactions
- To restrict credit the SARB sells securities. When banks buy these securities money flows from banks to the SARB. ๐ธ๐ธ
- The banks have less money to lend and cannot extend as much credit as before. ๐ธ๐ธ
- To encourage credit creation the SARB buys securities. Money flows into the banking system.๐ธ๐ธ
Moral suasion
- The SARB consults with banks to act in a responsible manner based on the prevailing economic conditions. ๐ธ๐ธ
Cash Reserve Requirements
- Banks are required to hold a certain minimum cash reserve in the central bank. ๐ธ๐ธ
- Banks have a limited amount to give out as credit. ๐ธ๐ธ
- South Africaโs fiscal policy is put into practice through the budgetary process. ๐ธ๐ธ
- The main purpose of fiscal policy is to stimulate macroeconomic growth and employment, and ensure redistribution of wealth. ๐ธ๐ธ
- The following instruments are used:
Progressive personal income tax
- Higher income earners are taxed at higher tax rates. ๐ธ๐ธ
- These taxes are used to finance social development. ๐ธ๐ธ
- The poor benefit more than those with higher incomes. ๐ธ๐ธ
Wealth taxes
- Properties are levied (taxed) according to their market values. ๐ธ๐ธ
- Transfer duties are paid when properties are bought. ๐ธ๐ธ
- Securities (shares and bonds) are taxed when traded. ๐ธ๐ธ
- Capital gains tax is levied on gains on the sale of capital goods (e.g. properties, shares). ๐ธ๐ธ
- Estate duties are paid on the estates of the deceased. ๐ธ๐ธ
- These taxes are used to finance development expenditures which benefit the poor moreย often. ๐ธ๐ธ
Cash benefits
- Old age pensions, disability grants, child support and unemployment insurance are cash grants. These are also known as social security payments. ๐ธ๐ธ
- Benefits in kind (natura benefits) ๐ธ๐ธ
- These include the provision of healthcare, education, school meals, protection etc. ๐ธ๐ธ
- When user fees are charged, poor or low income earners pay less or nothing. ๐ธ๐ธ
- Limited quantities of free electricity and water are provided. ๐ธ๐ธ
Other redistribution
- Public works programmes, e.g. the Strategic Integrated Projects (SIP) provides employment subsidies and other cash and financial benefits such as training, financing and export incentives.๐ธ๐ธ
Land restitution and land redistribution
- Land restitution is the return of land to those that have lost it due to discriminatory laws in theย past. ๐ธ๐ธ
- Land redistribution focuses on land for residential (town) and production (farm) for previously disadvantaged groups. ๐ธ๐ธ
- The money for these programmes is provided in the main budget. ๐ธ๐ธ
Subsidies on properties
- It helps people to acquire ownership of fixed residential properties. ๐ธ๐ธ
- E.g. governmentโs housing subsidy scheme provides funding to all people earning less thanย R3 500 per month๐ธ๐ธ
CONCLUSION The demand-side approach focuses on the expansion of the demand for goods and services produced in the economy. ๐ธ๐ธ OR To ensure economic growth, there should be an adequate and growing demand for goods and services produced in the economy. ๐ธ๐ธ
[Any other relevant higher order conclusion] [Max 2]
INTRODUCTION Different growth and development strategies have been implemented in South Africa since 1994, each aimed at addressing particular needs at the time of introduction. ๐ธ๐ธ [Any other relevant introduction] [Max 2]
BODY-MAIN PART The Reconstruction and Development Programme (RDP)
- The RDP was an integrated, coherent socio-economic policy framework that was implemented directly after our first democratic elections in 1994. ๐ธ๐ธ
- It seeked to mobilise all our people and our countryโs resources toward the final eradication of apartheid and the building of a democratic, non-racial and non-sexist future. ๐ธ๐ธ
The RDP was based on six principles.
- an integrated and sustainable programme. ๐ธ๐ธ
- a people-driven process focusing on the needs of the population. ๐ธ๐ธ
- peace and security for all, aimed at a non-violent society that respects all human rights. ๐ธ๐ธ
- nation-building, focusing on the needs of all members of society. ๐ธ๐ธ
- linking reconstruction and development. ๐ธ๐ธ
- The RDP consisted of many proposals, strategies and policy programmes.
- All of these could, however be grouped into five major policy programmes that were linked to each other.
The five key programmes were:
- meeting basic needs. ๐ธ๐ธ
- developing our human resources. ๐ธ๐ธ
- building the economy. ๐ธ๐ธ
- democratising the state and society. ๐ธ๐ธ
- implementing the RDP. ๐ธ๐ธ
The Growth, Employment and Redistribution Programme (GEAR)
- The GEAR built upon the strategic vision set out in the RDP, i.e. ๐ธ๐ธ
- The importance of all the objectives of the RDP was reaffirmed but it recognized the implementation and macroeconomic problems that the government had been experiencing in implementing the RDP. ๐ธ๐ธ
- The RDP placed much more emphasis on disciplined economic policy. ๐ธ๐ธ
- While still recognizing that there were very serious needs that had to be addressed. ๐ธ๐ธ
The Accelerated and Shared Growth Initiative for South Africa Programme (AsgiSA).
- AsgiSA resulted from governmentโs commitment to halve unemployment and poverty by 2014. ๐ธ๐ธ
- The Joint Initiative on Priority Skills Acquisition (Jipsa) was established to address the scarce and critical skills needed to meet AsgiSAโs objectives. ๐ธ๐ธ
AsgiSA identified six important factors that prevented growth:
- the relative volatility of the currency. ๐ธ๐ธ
- the cost, efficiency and capacity of the national logistics system. ๐ธ๐ธ
- shortages of suitably skilled labour, and the spatial distortions of apartheid affecting low-skilled labour costs. ๐ธ๐ธ
- barriers to entry, limits to competition and limited new investment opportunities. ๐ธ๐ธ
- the regulatory environment and the burden on small and medium enterprises (SMEโs). ๐ธ๐ธ
- AsgiSA was not intended to be a government programme. ๐ธ๐ธ
- But rather a national initiative supported by all the key groups in the economy. ๐ธ๐ธ
- Namely business, labour, entrepreneurs and government and semi-government departments and institutions. ๐ธ๐ธ
Joint Initiative on Priority Skills Acquisitions (JIPSA)
- It is the skills development arm of ASGISA. Focus is on skills development, especially through the SETAS. ๐ธ๐ธ
Expanded Public Works Programme (EPWP)
- It is a nationwide government intervention to create employment using labour-intensive methods, and to give people skills they can use to find jobs when their work in the EPWP is done. ๐ธ๐ธ
The New Growth Path (NGP)
- The New Growth Path (NGP) was released in November 2011. ๐ธ๐ธ
- This plan is designed to serve as a framework for economic policy, and to be the driver of the countryโs job strategy. ๐ธ๐ธ
The New Growth Path therefore proposes certain strategies to ensure adequate demand:
- Deepening the domestic and regional market by growing employment. ๐ธ๐ธ
- Increasing incomes and undertaking other measures to equity and income distribution. ๐ธ๐ธ
- Widening the market for South African goods and services through a stronger focus on exports to the region and other rapidly growing economies. ๐ธ๐ธ
- On a macroeconomic level the NGP entails accommodating or looser monetary policy combined with stricter fiscal policy to limit inflationary pressures and enhance competitiveness. ๐ธ๐ธ
- Government spending will be prioritised with the objective of long-term sustainable employment opportunities. ๐ธ๐ธ
The microeconomic measures to control inflationary pressures include the following:
- A competition policy to supervise monopoly pricing on products and services. ๐ธ๐ธ
- A review of administered prices to ensure that they do not increase above inflation without compelling reasons. ๐ธ๐ธ
- Interventions in the case of rapidly rising prices of essential products and services such as private๐ธ๐ธ
- Healthcare and basic food items. ๐ธ๐ธ
- Active industrial policy. ๐ธ๐ธ
- Rural development policy. ๐ธ๐ธ
- Competition policy. ๐ธ๐ธ
- Stepping up education and skills development. ๐ธ๐ธ
- Enterprise development: promoting small business and entrepreneurship; eliminating unnecessary red tape. ๐ธ๐ธ
- Broad-based Black Economic Empowerment (BBBEE). ๐ธ๐ธ
- Labour practices. ๐ธ๐ธ
- Technology policy. ๐ธ๐ธ
- Developmental trade policies. ๐ธ๐ธ
- Policies for African development. ๐ธ๐ธย
- The different growth and development strategies that have been implemented in South Africa since 1994. ๐ธ๐ธ
- Have all contributed to making our country more prosperous and to address problems created by inequalities of the past. ๐ธ๐ธ
- However, problems such as a low level of education, unemployment and unequal distribution of income persist. ๐ธ๐ธ
- The current NGP is a comprehensive policy that is focused on addressing all of these problems. [Any other relevant higher order conclusion] [Max 2]
INTRODUCTION South Africaโs overall objective of Industrial Development Policy is to ensure international competitiveness in its nine provinces. OR Regional development is aimed at increasing the economic livelihood of specific areas or regions. OR Regional development attempts to limit the negative effects of economic activities in only a few areas. OR It attempts to promote the advantages of a more even regional development by using labour and other natural resources and infrastructure in neglected areas. [Accept any relevant introduction] [Max 2]
BODY-MAIN PART SPATIAL DEVELOPMENT INITIATIVES
- SDI Programme attracts infrastructure and business investments to underdeveloped areas to create employment. ๐ธ๐ธ
- Department of Trade and Industry is driving force behind industrial and spatial development. ๐ธ๐ธ
- DTI plans together with central, provincial and local government, IDC, parastatals and research institutions. ๐ธ๐ธ
- Industrial Development Policy Programme (Spatial Development) has 2 focus points spatial development initiative (SDI) and financial incentives. ๐ธ๐ธ
- SDI refers to governmentโs initiative and economic development potential of certain specific spatial locations in SA. ๐ธ๐ธ
Key Objectives:
- Stimulate economic activity in selected strategic locations. ๐ธ๐ธ
- Generate economic growth and foster sustainable industrial development. ๐ธ๐ธ
- Develop projects of infrastructure in certain areas and finance them through lending and private sector investment. ๐ธ๐ธ
- Establish private-public partnerships (PPPโs). ๐ธ๐ธ
In areas with high poverty and unemployment, SDI focuses on:
- High level support in areas where socio-economic conditions require concentrated government assistance. ๐ธ๐ธ
- Where inherent economic potential exists. ๐ธ๐ธ
- The approach is towards international competitiveness, regional cooperation and a more diversified ownership base. ๐ธ๐ธ
Some of the main focus points of the SDI Programme are:
- Lubombo Corridor (agro-tourism, education, craft, commercial and agricultural sectors); ๐ธ๐ธ
- KwaZulu-Natal (Ports of Durban and Richards Bay); ๐ธ๐ธ
- West Coast SDI (fishing and industrial ports); ๐ธ๐ธ
- Coast-2-Coast Corridor with agro-tourism. ๐ธ๐ธ
- It also makes it possible for private sector businesses to take advantage of the economic potential of underdeveloped areas in private-public partnerships (PPPโs) ๐ธ๐ธ
- In PPP a private business may provide the capital to build the factory and to buy raw materials and employ labour, while the government provides the capital for the infrastructure such as roads and water and electricity. ๐ธ๐ธ
- The business benefits from profits and the government benefits from taxes, levies and employment opportunities. ๐ธ๐ธ
There are TWO types of PPPโs which are compensated differently: Unitary payments:
- Private sector builds and runs a project (it performs the function on behalf of the public sector); the payment provides an acceptable return on the total investment (building cost, maintenance, operational expenses). ๐ธ๐ธ
- Private sector constructs the project and then is given the right to change a toll fee (e.g. public road); ๐ธ๐ธ
- The toll covers costs of construction, maintenance, operation. ๐ธ๐ธ
- The above options can be combined: E.g. hospital (cost of building is an annual payment and a user fee is also charged). ๐ธ๐ธ
- A track of land that forms a passageway allowing access from one area to another and particular advantages to mining, manufacturing and other businesses. ๐ธ๐ธ
- Domestic Corridor: e.g. Lubombo, West Coast, Fish River. ๐ธ๐ธ
- Corridors beyond the South African Borders (SADC) e.g. Maputo Development Corridor Mozambique. ๐ธ๐ธ
- Reasons in support of South Africaโs regional integration in Southern Africa: have political and stable neighbours have important export markets and a future source of water and energy supplies integration may be a precondition for support from foreign investors, donors and multilateral institutions. ๐ธ๐ธ
- A robust regional transport system and a solid infrastructure base hold the key to attracting investment into the SADC region โ improving competitiveness and promoting trade. ๐ธ๐ธ
Advantages from Corridor development:
- Greater levels of economic efficiency and productivity compact urban form corridor urban form. ๐ธ๐ธ
- Corridor developments will often occur due to private investment. ๐ธ๐ธ
- Intergration of land use and transport planning will lead to generally efficient integration. ๐ธ๐ธ
- Efficient urbanisation leads to efficient use of land and promotion of an efficient transport system. ๐ธ๐ธ
INDUSTRIAL DEVELOPMENT ZONES (IDZโs)
- Geographically designed, purpose-built industrial sites providing services tailored for export- orientated industries. ๐ธ๐ธ
- Physically enclosed and linked to an international port or airport. ๐ธ๐ธ
- Specifically designed to attract new investment in export-driven industries. ๐ธ๐ธ
- Falls outside domestic customs zones and able to import items free of customs and trade restrictions, add value and then export their goods. ๐ธ๐ธ
- Development and management done by private sector. ๐ธ๐ธ
- Government IDZ policy designed to boost exports and jobs. ๐ธ๐ธ
- IDZโs aim to encourage economic growth โattract foreign investment in industrial development โ facilitate international competitiveness regarding manufacturing. ๐ธ๐ธ [Max 26]
ADDITIONAL PART FINANCIAL INCENTIVES Small and Medium Enterprise Development Programme (SMEDP) โข This incentive has provided a tax-free cash grant for investment in industries in
- South Africa. ๐ธ๐ธ
- E.g. manufacturing, agricultural, processing, aquaculture and tourism. ๐ธ๐ธ
Critical Infrastructure Fund Programme (CIF)
- A tax-free cash grant incentive for projects has improved critical infrastructure inย South Africa. ๐ธ๐ธ
- E.g. for installation, construction of infrastructure, payment of employees, materials directly consumed during installation. ๐ธ๐ธ
Duty Free Incentives (for businesses operating in the IDZโs)
- This has encouraged export-orientated manufacturing to increase their competitiveness ๐ธ๐ธ
- And helped to promote foreign and local direct investment. ๐ธ๐ธ
Foreign Investment Grant (FIG)
- This has assisted foreign investors to invest in new manufacturing businesses in SA. ๐ธ๐ธ
- Benefited in terms of the cost of relocating new machinery and equipment from abroad. ๐ธ๐ธ
Strategic Investment Projects (SIP)
- This has attracted investment from local and foreign entrepreneurs in manufacturing, computer, research and engineering sectors. ๐ธ๐ธ
Skills Support Programme (SIP)
- This cash grant for skills development has encouraged greater investment ๐ธ๐ธ
- In training in general and stimulated the development of new advanced skills. ๐ธ๐ธ
Black Businesses Supplier Development Programme (BBSDP)
- This 80 % cash grant has provided black-owned enterprises with access to ๐ธ๐ธ
- Training which has improved management of their enterprises. ๐ธ๐ธ
Special Economic Zones (SEZ)
- It is an extention to the current financial incetives to further promoted regional development. ๐ธ๐ธ
- The major incentive is a tax reduction of 15 % for businesses settling in this area. ๐ธ๐ธ
- This does not mean that existing businesses in the IDZ can relocate to take advantage of this incentive. ๐ธ๐ธ
- If a current business in the IDZ wants to expand they are allowed. ๐ธ๐ธ [Max 10]
CONCLUSION From the above discussion it is clear that different initiatives form part of South Africaโs Regional Industrial Development Programme. [Max 2]
INTRODUCTION Economic indicators are used to evaluate the economic performance of an economic unit. This unit can be a company, an industry, a country or a region. Macro-economic indicators, measures the economic performance of a country as a whole. ๐ธ๐ธ
BODY-MAIN PART Such indicators can provide an indication of:
- Changes taking place in a country. ๐ธ๐ธ
- How a country compares to other countries. ๐ธ๐ธ
Inflation Rate
- This is the general increase in the price level of goods and services in the economy over a certain period in time. E.g. one year. ๐ธ๐ธ
- This is therefore an indicator of the health of the economy and it is monitored in two ways that is at the production wholesale level producer price level (PPI) and at the retail or consumer level consumer price index (CPI) ๐ธ๐ธ
The Consumer Price Index (CPI)
- Shows the price increases of a representative (weighted) basket of goods and services that consumers buy. ๐ธ๐ธ
- It is abbreviated as CPI this cover all the urban areas. ๐ธ๐ธ
- It is an overall index and weights are obtained from expenditures of different income categories of households. ๐ธ๐ธ
- It is the most comprehensive indicator measuring consumer inflation in the country. ๐ธ๐ธ
- It shows changes in the general purchasing power of the rand and it is used for inflation targeting ๐ธ๐ธ
- Is compiled by Stats SA and measures the change in the price level of a basket of consumer goods and services. ๐ธ๐ธ
- The goods and services included in the basket are chosen to represent the goods and services purchased by an average household. ๐ธ๐ธ
- This basket is adjusted from time to time as consumption patterns change. ๐ธ๐ธ
- The inflation rate is the percentage change in the CPI from the previous year and can be calculated as follows:
- Change in CPI x 100ย ๐ธ๐ธ ย ย ย ย CPI
The Production Price Index (PPI)
- Used to measure the price of goods that are produced domestically when they leave the factory year. ๐ธ๐ธ
- The goods that are imported when they enter the country (at a port) and both of these are before consumers become involved. ๐ธ๐ธ
- PPI consists of three baskets that are domestically manufactured outputs, e.g. changes in the PPI can be made monthly or quarterly or yearly. ๐ธ๐ธ
- While changes in the imported products and exported commodities are given separately in the same report. ๐ธ๐ธ
- PPI includes capital and intermediate goods but not services. ๐ธ๐ธ
- It is based on a completely different type of a basket of items in the CPI. ๐ธ๐ธ
- It measures the cost of production rather than the cost of living. ๐ธ๐ธ
- It is used to predict consumer goods inflation (CPI) ๐ธ๐ธ
- Which is also estimated and published on a monthly basis by Stats SA, is similar to the CPI, ๐ธ๐ธ
- Except that it also includes the prices of raw materials and intermediary goods ๐ธ๐ธ (i.e. goods that will be finished in the production process), excludes VAT and excludesย services. ๐ธ๐ธ
- Manufactured goods included in the PPI are priced when they leave the factory, not when they are sold to consumers. ๐ธ๐ธ
- Unlike the CPI, the PPI therefore cannot be related directly to consumersโ living standards. ๐ธ๐ธ
- The PPI is nevertheless very useful in the analysis of inflation because it measures the cost of production. ๐ธ๐ธ
- A significant change in the rate of increase in the PPI is usually an indication that the rate of increase in the CPI will also change a few months later. ๐ธ๐ธ
The GDP Deflator Is a ratio that indicates the relationship of the GDP at nominal prices to the GDP at real prices. GDP deflator = Normal GDP x 100ย ๐ธ๐ธย ย ย ย ย ย ย ย ย ย ย ย ย ย Real GDPย
Nominal GDP
- Is the value of total gross domestic product measured at current prices. ๐ธ๐ธ
- While the real GDP is the value of total gross domestic product measured at constant prices.๐ธ๐ธ
- So, the GDP deflator includes changes in the prices of exports but not of imports. ๐ธ๐ธ
- In a small open economy, like that of South Africa where both, imports and exports are significant in relation to the total size of the economy. ๐ธ๐ธ
- The exclusion of import prices is an important shortcoming. ๐ธ๐ธ
Unemployment rate
- In terms of economic development, employment is a very important indicator. ๐ธ๐ธ
- Employment is, however, not very easy to measure as so many people are employed in the informal sector which is not recorded. ๐ธ๐ธ
- The concept of underemployment is also important. ๐ธ๐ธ
- This is when someone is employed in a position that requires less skill than their ability. ๐ธ๐ธ
- For example when a qualified accountant works as a delivery person because he or she cannot find employment as an accountant. ๐ธ๐ธ
- Someone may also be employed on a part-time basis but would prefer to work full time. ๐ธ๐ธ
- A labour force survey is published quarterly by Stats SA. ๐ธ๐ธ
- This publication contains information and statistics concerning a variety of issues related to the labour market, including the official unemployment rate. ๐ธ๐ธ
- It is a comprehensive survey and provides information on changes in employment in different provinces and industries. ๐ธ๐ธ
- Employment in the informal sector, and even reasons for changes in employment figures. ๐ธ๐ธ
- The unemployment rate is a percentage of the total labour force. ๐ธ๐ธ
- The total labour force includes all employed people and unemployed people who are looking for work. ๐ธ๐ธ
- The unemployment rate is a lagging indicator, which means that it will only change a few periods after the trend in the economy has changed. ๐ธ๐ธ
- For example if the economy starts growing at a faster pace. ๐ธ๐ธ
- The unemployment rate will only react to the growth after two or three quarters. ๐ธ๐ธ
Interest rates
- Interest rates are important indicators of future economic activity, as the interest rate level is usually an important determinant when economic decisions are being taken. ๐ธ๐ธ
- Both the general interest rate level and the structure of interest rates are important indicators.๐ธ๐ธ
- There are many interest rates in the economy. ๐ธ๐ธ
- Some are short term rates, such as the repo rate, which is the interest rates at which South Africa banks borrow from the Reserve Bank to finance their liquidity deficit. ๐ธ๐ธ
- The difference between the short term interest rates and long term interest rates: ๐ธ๐ธ
- Is called the interest rate spread and the term structure of interest rates provides an indication of the interest rates levels on loans or investments of different maturities. ๐ธ๐ธ
- Usually we can expect the interest rates level in a developing country to be higher than the interest rate in a developed economy. ๐ธ๐ธ
- This is due to the higher risk attached to the developing economy. ๐ธ๐ธ
- Factors such as political and economic uncertainty cause this higher risk. ๐ธ๐ธ
- Developing economies also need to attract foreign investment to their countryย ย to finance growth. ๐ธ๐ธ
- Investorsโ funds will move towards the highest yield and thereof. ๐ธ๐ธ
- Developing countries cannot allow interest rates in their countries to become too low. ๐ธ๐ธ
Money Supply
- The increase in the M3 money supply is an important economic indicator. ๐ธ๐ธ
- If M, the money supply increases, this means that either (P) prices or Y (output) has to respond to the increase in M. ๐ธ๐ธ
- Therefore, an increase in the money supply is an important indicator showing that output will increase. ๐ธ๐ธ
- Whether this will translate to an increase in real production or the price level will depend on factors like production within the economy. ๐ธ๐ธ
- In addition to economic growth the employment of people of working age (15 -64 years) is a majot economic objective. ๐ธ๐ธ
- We need to know more than this; we need to know who the people are that need to be employed. ๐ธ๐ธ
- The numbers are determined, not only by age, but also by peopleโs willingness to work. ๐ธ๐ธ
The Economically Active Population (EAP)
- The EAP is also known as the labour force. ๐ธ๐ธ
- It consists of people between the age of 15 and 64 who are willing to work for income in cash or in kind and includes: ๐ธ๐ธ
- Workers in the formal sector- workers in the informal sector. ๐ธ๐ธ
- Employers any one ๐ธ๐ธ
- Self employed persons. ๐ธ๐ธ
Related Items
- BBR or BSR - Economics Grade 12 Study Guides and Notes
- SOUTH AFRICA'S ECONOMIC AND SOCIAL INDICATORS QUESTIONS AND ANSWERS
- ENVIRONMENTAL SUSTAINABILITY QUESTIONS AND ANSWERS GRADE 12
- TOURISM INFLATION QUESTIONS AND ANSWERS GRADE 12
- INFLATION QUESTIONS AND ANSWERS GRADE 12
- SOUTH AFRICA'S INDUSTRIAL POLICIES AND THEIR SUITABILITY IN TERMS OF INTERNATIONAL BEST PRACTICE QUESTIONS AND ANSWERS GRADE 12
- ECONOMIC GROWTH AND DEVELOPMENT QUESTIONS AND ANSWERS GRADE 12
- THE REASONS AND CONSEQUENCES OF MARKET FAILURES QUESTIONS AND ANSWERS GRADE 12
- THE DYNAMICS OF IMPERFECT MARKETS QUESTIONS AND ANSWERS GRADE 12
Unemployed Persons
- The 2021 estimate of the South African population was million people. ๐ธ๐ธ
- The EAP numbered million ( % of the population). ๐ธ๐ธ
The Employment Rate
- The number of employed persons expressed as a percentage of the EAP gives the employment rate. ๐ธ๐ธ
- The employment rate can also be converted into an index. ๐ธ๐ธ
- The SA employment rate was % in 2011. ๐ธ๐ธ
- This is low, compared to rates in developed and even some developing countries such as Argentina and Pakistan. ๐ธ๐ธ
- ย In SA the growth in the economy is not accompanied by the similar growth in employment numbers. ๐ธ๐ธ
Employment indicators are used for:
- To calculate trends in employment in different sectors or industries. ๐ธ๐ธ
- This indicates structural changes in the economy. ๐ธ๐ธ
- To calculate productivity. ๐ธ๐ธ
- To show the success of the economy in utilizing its full potential. ๐ธ๐ธ
Unemployment Rate
- Statistics SA (SSA) obtains its labour data each year from Quarterly Labour Surveysย ย (QLFS). ๐ธ๐ธ
- It uses the standard definition of the International Labour Office (ILO) to calculate unemployment. ๐ธ๐ธ
- The strict definition of unemployment is used to calculate the unemployment rate. ๐ธ๐ธ
- Did not work during the seven days prior to the interview. ๐ธ๐ธ
- Want to work and are available to start work within a week of the week of the interview. ๐ธ๐ธ
- Have taken active steps to look for work or to start some form of self-employment in four week prior to the interview. ๐ธ๐ธ
- In SA the official unemployment rate was % in 2021. ๐ธ๐ธ
- In developed countries, change in the unemployment rate trigger responses. ๐ธ๐ธ
- From governments to fine-tune the economy. ๐ธ๐ธ
- Increases require more funds for unemployment insurance (UIF) drawings. ๐ธ๐ธ
- In developing countries, unemployment is the most important cause of poverty. ๐ธ๐ธ [Accept current statistical data] [Max 16]
- To give a policy direction in the country. ๐ธ๐ธ
- To develop mechanism to caution the most affected sectors of the economy promptly
- e.g.during the 2019-2020 recession/pandemic some companies required a bail out from the government. ๐ธ๐ธ
- Develop some economic stabilisers to defuse the huge impact that may result from theย unexpected economic downturn. ๐ธ๐ธ
- Open some other alternative markets for their goods and services. ๐ธ๐ธ
- To do research and advice the business community before the actual moment hits. ๐ธ๐ธ
- It can be used to stimulate thinking and growth in a number of sectors in the Economy. ๐ธ๐ธ [Accept any relevant consideration] [Max 10]
CONCLUSION Countries cannot survive and grow their economies if they do not pay attention to economic indicators for their planning processes. [Accept any relevant consideration] [Max 2]
INTRODUCTION Social indicators also called human development indicators as they promote improvement in the standard of living. ๐ธ๐ธ [Any other relevant definition] [Max 2]
BODY-MAIN PART Demographics
- This is the description of the physical population and its composition.
- To get this a census is done regularly to obtain this information. ๐ธ๐ธ
Human development Index (HDI)
- ย This is a measure of peopleโs ability to live long and healthy lives, to communicate, ๐ธ๐ธ
- ย To participate in the community and to have sufficient income to experience a decent lifestyle. ๐ธ๐ธ
Human poverty index (HPI)
- ย It measures life expectancy is measured by the percentage of newborns not expected to survive to age 40. ๐ธ๐ธ
- ย Lack of education is measured by the percentage of adults who are ill- educated. ๐ธ๐ธ
Health and nutrition
- Life expectancy birth. ๐ธ๐ธ
- Infant mortality rate. ๐ธ๐ธ
Nutrition indicators
- Daily calorie intake per person. ๐ธ๐ธ
- The number of children who go hungry. ๐ธ๐ธ
- These measures are important to government as they are supplying healthcare and sometime have to include legislation such as adding vitamin A to basic foodstuffs such as bread. ๐ธ๐ธ
- The standard of living of people is directly connected to their education. ๐ธ๐ธ
- Educated people are employable and can earn an income and provide for their own wants and needs. ๐ธ๐ธ
Two important measures are:
- Secondary enrolment percemtage-how many children that start Grade 1 get to Grade 8 and finish Grade 12. ๐ธ๐ธ
- Adult literacy- People over the age of 15 that can read and write. ๐ธ๐ธ
- A large percentage of the annual budget is allocated to education. ๐ธ๐ธ
- Because of our constitution certain basic services must be supplied by the government. ๐ธ๐ธ
- These services have a direct effect on peopleโs living standards. ๐ธ๐ธ
- Electricity ๐ธ๐ธ
- Refuse disposal๐ธ๐ธ
- Water supply๐ธ๐ธ
- Sanitation๐ธ๐ธ
Housing and urbanisation
- Urbanisation the process by which an increasing proportion of a countryโs population is concentrated in its urban areas as a result of natural increase and migration from rural areas. ๐ธ๐ธ
- This measures is important as more people come to live in urban areas the greater the demand for housing, services, education, health care etc. ๐ธ๐ธ
- Housing the percentage of the population living in a permanent dwelling or house. ๐ธ๐ธ
- The government issue housing subsidies to help poor people to own a house South African citizens or permanent residents earning R3 500 or less a month could apply for this subsidy. ๐ธ๐ธ
International comparisons
- Figures collected by the World Bank, International Monetary Fund (IMF) and United Nations provide the best data for comparison purpose. ๐ธ๐ธ
Other measures used:
- Purchasing power parity (PPP) The number of units of one countryโs currency that give the holder the same purchasing power as one unit of another countryโs currency. ๐ธ๐ธ
- The Big Mac Index, The index is based on the price of the Big Mac around the world as compared to its price in the United States. ๐ธ๐ธ [Max 40]
CONCLUSION From the above discussion it is clear that social indicators play a significant role in South Africa. It is, therefore, of the utmost importance that we should study their uses in depth. [Max 2]
MICROECONOMICS-PAPER 2
INTRODUCTION A perfect market is a market structure which has a large number of buyers and sellers.ย OR The market price is determined by the industry (demand and supply curves).ย OR This means that individual businesses are price takers, i.e. they are not able to influence prices. OR Perfect competition is an imaginary situation, whereas monopolistic competition is a reality. ๐ธ๐ธ [Accept any other relevant introduction] [Max 2]ย
BODY-MAIN PART
- The indicating of the equilibrium positions on the perfect market structure is of utmost importance because from this point where MC = MR
- The dotted lines will be drawn to show economic profit or economics loss.ย
- Where the dotted lines intersect the AC and AR curves either normal profit or economic profit or economic loss will be indicated and shadowed.
Mark allocation for graph:
- Position / shape of MC curve = 1 mark
- MR curve = 1 mark
- Position / shape of AC curve = 2 marks
- Equilibrium point = 1 mark
- Indication of price / quantity = 1 mark
- Shading of economic loss = 2 marks MAX MARKS = (8)
Allocate marks on the graph according to the rubric provided and if facts are duplicated again in writing, do not allocate marks. Max of 8 marks.
- Equilibrium is at E 1 i.e. where MC = MRย
- At this point Q 1 goods are produced at a price of P 1 ย
- The averages cost for Q 1 units is point R on the AC curveย
- Price / AR is greater than AC ( TR > TC)
- Therefore economic profit is represented by the area P 1 SRE 1 ย
- Equilibrium is at E 1 i.e. where MC = MR
- At equilibrium (point E 1 ) average cost is equal to priceย
- The AC curve is tangent to the demand curve which means that P/AR = AC (TR = TC)ย
- The business makes normal profit which is the minimum earnings required to prevent the entrepreneur from leaving the industry.ย
- Equilibrium is at E1, i.e. where MC = MRย
- At this point Q1 goods are produced at a price of P1ย
- At equilibrium (point E1) price/AR is less than average cost/the AC curve is lies above the demand curve which means that P/AR < AC (TR < TC)ย
- The business makes an economic loss A maximum of 24 marks will be allocated for graph illustration and analysis: 8 marks max per graph illustration - (Max 26 marks)
ADDITIONAL PART CONDITIONS For a market to successfully operate under perfect competition, the following conditions should prevail at the same time:
- No firm can influence the market price (price takers) due to a large number of buyers and sellersย
- Products are identical (homogeneous)ย
- There are no barriers of entry, meaning that there is freedom of entry and exitย
- Buyers and sellers act independently - no collusion between sellersย
- No government interference to influence the market โ the market is unregulatedย
- Free movement between markets - all factors of production are completely mobileย
- Both buyers and sellers have full knowledge of all the prevailing market conditions (perfect information)ย
- If any of the above conditions are not met, the market is regarded as an imperfect market Any 5 x 2 = [Max 10 marks]
CONCLUSION Freedom of entry and exit into the perfect market alter the supply of goods on the market. This will result in changes in price which influences the profit or loss of a business.ย If price falls to a level where it is equal to the AVC then the firm will shut-down.ย [Max 2] Discuss the monopoly in detail (with/without the aid of graphs) (Imperfect Market)
INTRODUCTION A firm is regarded as a monopolist when it owns or controls the total supply of a scarce factor of production. Monopoly is a market structure where only one seller operates. ๐ธ๐ธ
BODY: MAIN PART The characteristics of a monopoly
Number of firms
- The monopoly consists out of one single firm. ๐ธ๐ธ
- The monopoly is also the industry. ๐ธ๐ธ
- Example: Eskom or De Beers โ diamond-selling ๐ธ๐ธ [Accept any other relevant example]
Nature of product
- The product is unique with no close substitute. ๐ธ๐ธ
- Example: Diamonds are unique. ๐ธ๐ธ
Market entry
- Refers to how easy or difficult it is for businesses to enter or to leave the market ๐ธ๐ธ
- Is entirely/completely blocked. ๐ธ๐ธ
- Economies of scale ๐ธ๐ธ
- Limited size of the market ๐ธ๐ธ
- Exclusive ownership of raw materials ๐ธ๐ธ
- Licensing ๐ธ๐ธ
- Sole rights ๐ธ๐ธ
- Import restrictions ๐ธ๐ธ
They decide on their production level
- The monopolist cannot set the level of output and the price independently of each other. ๐ธ๐ธ
- If a monopolist wants to charge a higher price, it has to sell fewer units of goods. ๐ธ๐ธ Alternatively, a reduction in price will result in a higher output sold. ๐ธ๐ธ
- A monopolist is confronted with a normal market demand curve ๐ธ๐ธ
- The demand curve slopes downwards from left to right ๐ธ๐ธ
- Any point on the monopolistโs demand curve (D) is an indication of the quantity of the product that can be sold and the price at which it will trade. ๐ธ๐ธ
They are exposed to market forces
- Consumers have limited budgets and a monopoly can therefore not demand excessive prices for its product. ๐ธ๐ธ
- The monopolistโs product has to compete for the consumerโs favour and money with all other products available in the economy. ๐ธ๐ธ
They face substitutes
- There are few products that have no close substitutes. ๐ธ๐ธ
- For example, cell phones can compete with telephone services. ๐ธ๐ธ
They may enjoy favourable circumstances
- Sometimes an entrepreneur may enjoy favourable circumstances in a certain geographical area. ๐ธ๐ธ
- For example, there may be only one supplier of milk in a particular town. ๐ธ๐ธ
They may exploit consumers
- Because a monopolist is the only supplier of a product, there is always the possibility of consumer exploitation. ๐ธ๐ธ
- However, most governments continually take steps to guard against such practices. ๐ธ๐ธ
Market Information
- All information on market conditions is available to both buyers and sellers. ๐ธ๐ธ
- This means that there are no uncertainties. ๐ธ๐ธ
Control over price
- In the case of a monopoly there are considerable price control, but limited by market demand and the goal of profit maximisation. ๐ธ๐ธ
Long-run economic profit Can be positive
- Because new entries are blocked and short-run economic profit therefore cannot be reduced by new competing firms entering the industry ๐ธ๐ธ
- The monopoly can thus continue to earn economic profit as long as the demand for its product remains intact ๐ธ๐ธ
Heading = 1 mark AC = 1 mark DD/AR =ย 1 mark MC =ย 1 mark Profit maximisation point =1 mark Labelling of the axis =ย 1 mark Labelling on the axis =ย 1 mark
Long run equilibrium of a perfect competitor
CONCLUSION A monopoly does not always make economic profit in the short run; it can also make economic loss in the short run if the total cost exceeds total revenue. ๐ธ๐ธ
INTRODUCTION
- The oligopoly is a type of imperfect market in which only a few large producers dominate the market. ๐ธ๐ธ [Accept any other relevant and correct response]
MAIN PART Nature of product
- The product may be homogeneous in a pure oligopoly. ๐ธ๐ธ
- If the product is differentiated, it is known as a differentiated oligopoly. ๐ธ๐ธ
Market information
- There is incomplete information on the product and the prices. ๐ธ๐ธ
- ย Market entry is not easy, it is limited in the sense that huge capital outlay might be necessary. ๐ธ๐ธ
- Oligopolists have considerable control over price, it can influence price, but not as much as the monopolist. ๐ธ๐ธ
- Oligopolies can frequently change their prices in order to increase their market share and this result in price wars. ๐ธ๐ธ
Mutual dependence
- The decision of one firm will influence and be influenced by the decisions of the other competitors. ๐ธ๐ธ
- Mutual dependence (interdependence) exists amongst these businesses.
- A change in the price or change in the market share by one firm is reflected in the sales of the others. ๐ธ๐ธ
Non-price competition
- Non - price competition can be through advertising, packaging, after-sales services. ๐ธ๐ธ
- Since price competition can result in destructive price wars, oligopolies prefer to compete on a different basis. ๐ธ๐ธ
- Participants observe one another carefully- when one oligopolist launches an advertising campaign, its competitors soon follow suite. ๐ธ๐ธ
- If oligopolies operate as a cartel, firms have an absolute cost advantage over the rest of the other competitors in the industry. ๐ธ๐ธ
- Collusion is a strategy used by firms to eliminate competition amongst each other. ๐ธ๐ธ
- It can be in a form of overt collusion where firms can work together to form a cartel and tacit collusion where a dominating business controls the price. ๐ธ๐ธ
Limited competition
- There are only a few suppliers manufacturing the same product. ๐ธ๐ธ
Economic profit
- Oligopolies can make an economic profit over the long term. ๐ธ๐ธ
- Abnormal profits may result to joint decision-making in an oligopoly. ๐ธ๐ธ
Demand curve
- Slope from left down to the right. ๐ธ๐ธ
- It is known as the kinked demand since it contains the upper relatively elastic slope and the lower relatively inelastic slope. ๐ธ๐ธ [Accept any other relevant and correct response] [Max. 26]
ADDITIONAL PART Oligopolist may increase their market share using non-price competition strategies by:
- branding their product to create an impression that its product is for a particular age group or income group. ๐ธ๐ธ
- aggressive advertising which inform customers about the business or product it provides.๐ธ๐ธ
- Using appealing packaging to bring out important features of their product.
- improving their customer service in order to ensure that they return to their businesses.๐ธ๐ธ
- providing relevant and precise information, which is crucial to the customers, since there are competitors in the market, customers will patronize the businesses that provides relevant information. ๐ธ๐ธ
- extending shopping hours to the convenience of customers.
- Offering loyalty rewards to customers which will encourage their return to spend accumulated rewards. ๐ธ๐ธย [Accept any other relevant response] [Max.10]
- In South Africa, oligopolists have been found to be illegally manipulating prices to their benefit, yet to the detriment of consumers and have been penalized for such action. ๐ธ๐ธ [Accept any other relevant response]
Compare and contrast any TWO types of market structures (perfect to imperfect/imperfect to imperfect) in detail in terms of the following. - Number of businesses - Nature of product - Entrance - Control over prices - Information - Examples - Demand curve - Economic profit/loss - Decision-making - Collusion - Productive/Technical efficiency - Allocative efficiency (Perfect Market and Imperfect Market)
โโMarket structures are classified under Perfect Competition, Monopolistic Competition, Oligopoly and Monopolyโโ Compare all FOUR market structures in a tabular form. NB: Learners should write in full sentences even if the comparison is done in a tabular format). (Marks depend on the combination of market structures to be examined)
PLEASE NOTE: THE ABOVE TABLE SHOULD BE VERBALLY WRITTEN AS PER ESSAY INSTRUCTION
INTRODUCTION Market failure is when the forces of supply and demand fail to allocate resources efficiently / when markets fail to allocate goods and services efficiently. ๐ธ๐ธ [Accept any other correct introduction] [Max 2]
BODY: MAIN PART ย ย ย ย ย ย ย ย ย ย ย ย ย ย
1. Missing Markets
- Markets are often incomplete in the sense that they cannot meet the demand for certain goods. ๐ธ๐ธ
- Public goods:
- They are not provided by the price mechanism because producers cannot withhold the goods from non-payment and there is often no way of measuring how much a person consumes. ๐ธ๐ธ
Public goods have the following features: Non-rivalry:
- The consumption by one person does not reduce the consumption of another person e.g. a lighthouse. ๐ธ๐ธ
Non-excludability:
- Consumption cannot be confined to those who have paid, so there are free riders e.g. radio and TV in South Africa. ๐ธ๐ธ
Merit goods
- These are goods/services that are deemed necessary or beneficial to the society, e.g. education, health care etc. ๐ธ๐ธ
- These goods are highly desirable for general welfare but not highly rated by the market, therefore provide inadequate output/supply. ๐ธ๐ธ
- If people had to pay market prices for them relatively too little would be consumed โ the market will fail. ๐ธ๐ธ
- The reason for undersupply of merit goods is that the market only takes the private costs and benefits into account and not the social costs and benefits. ๐ธ๐ธ
Demerit goods
- These are goods/services that are regarded as bad or harmful for consumption hence we should use less of these e.g. alcohol, cigarettes, etc. ๐ธ๐ธ
- Demerit goods lead to a lot of social costs, therefore, the government charges sin tax / excise duties to discourage the consumption of such goods. ๐ธ๐ธ
- While the market is willing to supply demerit goods, it tends to oversupply demerit goods. ๐ธ๐ธ
- Some consumers may be unaware of the true cost of consuming them. ๐ธ๐ธ
2 Lack of information
- Technical and allocative efficiency require that both producers and consumers have complete and accurate information about the costs and benefits of the goods and services produced and consumed in the market. Producers and consumers make production and consumption decisions based on the information they have. ๐ธ๐ธ
- When information is incomplete or inaccurate, it leads to wrong decisions about what to produce, how to produce and for whom to produce, and a waste of resources occurs. ๐ธ๐ธ
- Producers might not know all the different technologies and production techniques that are available and the different resources that can best be used to produce goods/services more efficiently. ๐ธ๐ธ
- Consumers might not know that the price of a product is lower from some other suppliers or about the harmful effects of a product since they might just base their decisions to consume on the information from a misleading suppliers. ๐ธ๐ธ
3. Immobility of factors of production
- Markets do not respond to changes in consumer demand if resources cannot be easily reallocated or due to a lack of information๐ธ๐ธ
- Labour takes time to move to into new occupations and geographically to meet the changes in consumer demand. ๐ธ๐ธ
- Physical capital e.g. equipment, buildings, land and raw materials can only move from one place to another at a high cost, but cannot be moved to fit a change in demand. ๐ธ๐ธ
- Technological applications change production methods e.g. use of robots rather than physical labour. It takes time for most industries to adapt. ๐ธ๐ธ
- With greater technological change there is an increasing need for workers to become flexible,ย to update skills, change employment, occupations and work patterns. ๐ธ๐ธ [Max 26]
- Motivate why government has implemented a national minimum wage in the labour market. ๐ธ๐ธ
- Pressure was put on the South African government to introduce labour laws which require employers to pay minimum wages. ๐ธ๐ธ
- The application of minimum wage laws is needed to improve a redistribution of income. ๐ธ๐ธ
The main objectives were:
- To redress inequality (Gap between wealthy and poor) ๐ธ๐ธ
- To improve the standard of living. ๐ธ๐ธ
- ย Government tried to protect domestic workers and farm workers โ thus preventing exploitation. ๐ธ๐ธย [Max 10] [Accept any other correct relevant response]
CONCLUSION Governments intervene in the market when market forces cannot achieve the desired output. [Max 2] [Accept any other relevant conclusion]
INTRODUCTION The purpose of government intervention is to ensure that the right quantity of resources is allocated to the production of output so that society as a whole [Accept any other relevant introduction] [Max 2] maximizes its benefits. ๐ธ๐ธ
- Sometimes government will set the price of a good or service at a maximum level that isย ย below the market price ๐ธ๐ธ
- The government intervene and passes a law that suppliers may not charge more than the maximum price ๐ธ๐ธ
- The immediate effect is that quantity supply will drop ๐ธ๐ธ
- The original market equilibrium price and quantity is P and Q respectively ๐ธ๐ธ
- The price set by the government is P1, at this price the demand will increase to Q1 and the supply will decrease to Q2 ๐ธ๐ธ
- The difference between Q1 and Q2 is the shortfall that will be created on the market ๐ธ๐ธ
- The shortage caused by the price ceiling creates a problem of how to allocate the good since the demand has increased ๐ธ๐ธ
- Black markets start to develop [Mark allocation: Graph 6 and discussion max. 10 marks]
- The appropriate way to intervene in the market by government is by levying taxes as a method to recover external cost ๐ธ๐ธ
- The original market equilibrium at e, with P as the equilibrium price and Q as the equilibrium quantity ๐ธ๐ธ
- The tax increase will shift the supply curve to the left ๐ธ๐ธ
- New equilibrium at E1 ๐ธ๐ธ
- A tax would raise the price from P to P1 ๐ธ๐ธ
- The production will decrease from Q to Q1 ๐ธ๐ธ [Mark allocation: Graph total 6 marks and discussion max 10 marks]
- Explain the supply of undesirable goods in South Africa and how the government can deal with it. ๐ธ๐ธ
- Items such as cigarettes, alcohol and non-prescription drugs are examples of demerit or undesirable goods. ๐ธ๐ธ
- These goods are often over supplied in the market, due to the fact that the external cost is not added to the market price. ๐ธ๐ธ
- Some consumers may be unaware of the true cost of consuming them, their negative externalities. ๐ธ๐ธ
- Government can ban their consumption or reduce it by means of taxation. ๐ธ๐ธ
- Taxation on these products will increase the market price and hopefully the demand for these products will drop. ๐ธ๐ธ [10 marks] [Accept any other correct relevant response]
CONCLUSION The intervention of government ensures that inefficiencies is eliminated and that the market is operating effectively ๐ธ๐ธ [Accept any other relevant conclusion] [Max 2]
CONTEMPORARY ECONOMIC ISSUES-PAPER 2
- This is a constant and significant increase in the general price level of goods and services in the country over a certain period of time, e.g. a year. ๐ธ๐ธ [Max 2] [Accept any relevant introduction]
BODY-MAIN PART Creditors and Debtors
- Whereas borrowers (debtors) benefit from price increases, lenders (creditors) suffer due to price increases. ๐ธ๐ธ
- This is because borrowers receive money with a relatively high purchasing power and they repay their loans with money with low purchasing power, unless interest rates are sufficient to prevent this occurrence. ๐ธ๐ธ
Salary and Wage Earners
- Price increases affect people whose incomes are relatively fixed (in other words, people whose incomes remains constant or do not increase at the same rate as prices do. ๐ธ๐ธ
- This group includes retired people, pensioners and the poor. ๐ธ๐ธ
- As prices increase, their almost fixed incomes purchase less and less. ๐ธ๐ธ
- However there are individuals and entrepreneurs whose incomes often increase at a rate that is higher than the inflation rate and they do not suffer but gain from inflation. ๐ธ๐ธ
- Globalization results in increased employment opportunities in the economy due to increased productivity, the need to produce more goods both for local and international markets rises in globalised economies. ๐ธ๐ธ
- The demand for increased skilled labour becomes a need as a result, this demand for labour benefits the local labour market in increased employment opportunities and growth. ๐ธ๐ธ
Investors and Savers
- Different types of investments are affected by inflation: Assets with fixed nominal values. ๐ธ๐ธ
- These assets have a fixed nominal value and give a return if they are held until maturity. ๐ธ๐ธ
- When they are paid, because their nominal values remain constant, the purchasing power of the nominal values decreases as prices increase (that is, their real value decreases). ๐ธ๐ธ
Assets with Flexible Market Values
- The holders of shares and fixed property usually gain by price increases because the nominal values of these assets tend to increase at least proportionately to the rate of inflation (that is, their market values are flexible). ๐ธ๐ธ
- Often the prices of these assets increase more rapidly than increases in the general price level.๐ธ๐ธ
- In this case, inflation creates wealth to the advantage of those holding such assets. ๐ธ๐ธ
- South Africa has a progressive personal income tax system. ๐ธ๐ธ
- This means that marginal and average tax rates increase in harmony with the income level. ๐ธ๐ธ
- The higher level an individualโs income, the greater the percentage of income he or she has to pay tax. ๐ธ๐ธ
- With inflation, taxpayersโ nominal income (wages and salaries) rise even when their real income remain unchanged. ๐ธ๐ธ
Taxes are levied on nominal income and not on real income.
- Therefore if the income tax schedule remains unchanged inflation increases the average rate of personal income tax. ๐ธ๐ธ
- Individuals will have to pay higher taxes even if they are actually no better off than before. ๐ธ๐ธ
- This phenomenon known as bracket creep, lads to a redistribution of income from taxpayers to the government. ๐ธ๐ธ
- Bracket deep results from a combination of inflation and progressive income tax. ๐ธ๐ธ
- It has the same effect as an increase in the tax rate. ๐ธ๐ธ
Industrial Peace
- Wage bargaining is often accompanied by strikes and mass action. ๐ธ๐ธ
- These actions can sometimes spill over into violence, which affects society at large. ๐ธ๐ธ
- In extreme situations in the presence of exceptionally high inflation together with a government that is determined not to yield to wage increase demands (which can push inflation to even higher levels), widespread civil unrest follows. ๐ธ๐ธ
Inflation has a negative effect on economic growth
- Inflation leads to increased uncertainty in the economy. ๐ธ๐ธ
- This uncertainty discourages savings and investments especially in the long term. ๐ธ๐ธ
- Which are necessary for economic growth โresult reduced economic growth. ๐ธ๐ธ
Inflation affects the real money value and savings
- Because inflation reduces the real value of money, it affects the real value of money saved in particular. ๐ธ๐ธ
- This means that inflation, the rand buys fewer goods and services than before. ๐ธ๐ธ
- It also means that the real money value saved is worth less at the end of the savings period than when the money was saved. ๐ธ๐ธ
- e.g. if a consumer receives 5 % interest on his/her savings account while the inflation rate is 8%, then the real rate of interest on the consumerโs savings is -3%.๐ธ๐ธ
Inflation has an adverse effect on a countryโs balance of payments (BOP).
- If a countryโs rate of inflation is higher than that of its trading partners the prices of exported goods increase while the prices of imported goods decrease. ๐ธ๐ธ
- This leads to loss of competitiveness in the export market, which in turn leads to decreased exports. ๐ธ๐ธ
This has a negative effect on the countryโs balance of payments (BOP).
- The loss of export competiveness can also increase unemployment inflation affects the redistribution of income in a country. ๐ธ๐ธ
The effects of inflation are uneven.
- While it does not clearly benefit anyone and certainly harms most, it also harms some less than others. ๐ธ๐ธ
- Inflation also tends to redistribute income from low-income groups to higher income groups. ๐ธ๐ธ
- This is because people in the low income groups do not have assets than can rise in value faster than the rate of inflation to help them overcome the effects of inflation. ๐ธ๐ธ
- Powerful groups such as trade unions large companies and the wealthy people, are able to increase their share of national income at the expense of disadvantaged people such as pensioners the unemployed and the welfare recipients. ๐ธ๐ธ
Inflation has social and political costs
- When inflation continually causes rising prices it makes people unhappy and can disturb relations between employers and the employees and between customers and traders or service providers. ๐ธ๐ธ
- People in lower-income brackets feel severe effects of increases in the price of essential items such as bread, maize meal rental and transport costs. ๐ธ๐ธ
- This can lead to social unrest and political unrest. ๐ธ๐ธ
Inflation feeds on itself and causes further inflation
- This is called the inflation spiral. ๐ธ๐ธ e.g. higher wage demands cause producers to increase their prices to maintain their profits.
- This happens again and again pushing prices further every time. ๐ธ๐ธ
- If the government does not keep this wage price spiral in check, inflation may get out of control and become hyperinflation. ๐ธ๐ธ [Max 26]
ADDITIONAL PART Debate the merits (benefits) of administered prices by the government
- These are prices regulated by the government e.g. home ownerโs costs on water/household fuel (paraffin and electricity) medical care (public hospitals) communication (telephone calls, telephone rentals and installations/postage cell communications /transport (petrol). ๐ธ๐ธ
- Most of the administered prices are adjusted once a year which brings price stability. ๐ธ๐ธ
- Regulated prices are restricted as to the extent to which prices may vary, depending on the governmentโs objectives. ๐ธ๐ธ
- Administered prices provide additional revenue to national treasury. ๐ธ๐ธ
- It appears that some of these prices remain extremely robust over the short term. ๐ธ๐ธ [Accept any other relevant response] [Max 10]
- If inflation is not controlled by the proper and effective instruments, it can have challenging problems to the economy in general. ๐ธ๐ธ
INTRODUCTION COST PUSH Inflation is a sustained and significant increase in general price level over a period of time and a simultaneous decrease in the purchasing power of money. Accept any other relevant introduction. ๐ธ๐ธ [Max 2]ย
BODY: MAIN PART Causes of cost-push inflation
Increase in Wages:
- In South Africa, increase in wages constitute more than 50% of Gross Value Added at basic prices ๐ธ๐ธ
- If the increase in wages is not accompanied by an increase in production, the cost of production will rise ๐ธ๐ธ
- Producers will increase the prices of their products to offset the high cost of production strikes and stay-aways / labour union activities ๐ธ๐ธ
Key inputs/ increase in prices of imported capital goods
- When the prices of key inputs that are imported increase, domestic cost of production ๐ธ๐ธ
- increases especially in the manufacturing sector ๐ธ๐ธ
- Supply shocks e.g. sudden increase of oil causes a knock-off effect ๐ธ๐ธ
Exchange rate depreciation
- A decrease in the value of the rand will result in an increase in prices of imports ๐ธ๐ธ
Profit margins
- When firms increase profit margins, the prices that consumers pay also increase ๐ธ๐ธ
- Sometimes firms use their market power to push up prices ๐ธ๐ธ
Productivity
- Less productive factors of production will lead to increased cost per unit ๐ธ๐ธ
- Strikes and stay-aways often reduce production output and can result in price increases ๐ธ๐ธ
Natural disasters
- Natural disasters such as drought, flood and global warming can impact on the cost of production ๐ธ๐ธ
- This is often the case in relation to food prices ๐ธ๐ธ
- An increase in interest rates results businesses paying more money for capital loaned firms recover these costs by increasing the prices of their products ๐ธ๐ธ
Increase in taxation
- Increase in direct tax like company income tax may lead to businesses increasing their prices to offset the extra burden ๐ธ๐ธ
- Increase in indirect tax such as custom duty will lead to increase in costs of supplying a particular product, therefore the price will increase ๐ธ๐ธ
- Administered prices increase e.g. fuel prices
- Shoplifting and losses caused by employees are added to the prices of products ๐ธ๐ธ [Accept any other relevant fact. Maximum 8 marks for headings] [Max. 26]
DEMAND PULL INFLATION Total spending on domestic goods and services in the economy consists of the spending by households, firms, the government and the foreign sector.
- Total spending = C + I + G + (X-M). ๐ธ๐ธ
Causes of demand inflation Increase in consumption [C] โ consumers expenditure will increase mainly for three reasons:
- a. If consumers save less & spend more๐ธ๐ธ
- b. Decrease in personal income tax. ๐ธ๐ธ
- c. A greater availability of consumer credit, because of decrease in interest rate. ๐ธ๐ธ
Investment [I] โWhen business invest this increase demand for labour, cement, sand and bricks. ๐ธ๐ธ
- Supply cannot keep up with the increase in demand and this will increase prices. ๐ธ๐ธ
- Lower interest rates may result in an improvement in the sentiment and profit expectations of businesses. ๐ธ๐ธ
- Businesses invest more and this may lead to an increase in the demand of goods and services that are part of the investment (for example, a new building requires cement bricks and labour).๐ธ๐ธ
- If aggregate demand increases at a faster rate than aggregate supply, price increases will follow.๐ธ๐ธ
Government Spending [G] โ Three main reasons.
- a. New capital projects๐ธ๐ธ
- b. Consumption expenditure on education, health, and protection. ๐ธ๐ธ
- c. Social expenditure on public work programme to create jobs and increase in social allowances. ๐ธ๐ธ
Export earnings [X]
- a. When economy of trading country improve. ๐ธ๐ธ
- b. When global economy expands. ๐ธ๐ธ
Access to credit
- There is greater availability of consumer credit (by means of credit cards) of the availability of cheaper credit as a result of decreases in lending rates. As new credit is extended the credit multiplier kicks in and more credit is created. ๐ธ๐ธ
Consumption spending
- Most governments will at times increase expenditures on education, health, protection and safety (for example, military equipment such as bomber jets and submarines). ๐ธ๐ธ
Social spending
- Governments sometimes feel they have to do something substantive about unemployment and poverty. ๐ธ๐ธ
- They borrow money and spend it on public works programmes or raise the level of social grants year after year at a higher rate than the inflation rate. ๐ธ๐ธ
- Such expenditures invariably lead to inflation because they add to aggregate demand without adding anything to aggregate supply. ๐ธ๐ธ
Commodities demand
- The worldโs demand for commodities expands and contracts like business cycles do. During an expansionary period, foreign demand increases and this leads to greater volumes of exports. The income earned from these exports adds to aggregate demand and prices increase. ๐ธ๐ธ
BODY: ADDITIONAL PART YES / NO
- Inflation targeting is when a particular percentage is set as an acceptable level for an increase in general price levels ๐ธ๐ธ
- The SARB's inflation target is a range of 3% and 6% ๐ธ๐ธ
- The aim of inflation targeting policy is to achieve and maintain price stability ๐ธ๐ธ
- The implementation of the inflation target is easy to understand โ expressed in numbers which makes it very clear and transparent ๐ธ๐ธ
- It reduces uncertainty and promotes sound planning in the public and private sectors ๐ธ๐ธ
- It provides an explicit yardstick that serves to discipline monetary policy and improves the accountability of the central banks ๐ธ๐ธ
- The SARB make use of monetary policy, specifically the repo rate to keep the inflation within the target range ๐ธ๐ธ
- The government make use of fiscal policy regarding public sector revenue and expenditure ๐ธ๐ธ
Positive effects
- Where demand is higher than supply an increase in interest rates help to bring the demand down ๐ธ๐ธ
- The policy can helps businesses to make economic plans without worrying about the effects of high inflation ๐ธ๐ธ
- South Africa's price level has been fairly stable since the introduction of the inflation targeting policy in 2000 ๐ธ๐ธ
Negative effects
- Inflation targeting can cause a reduction in economic growth ๐ธ๐ธ
- This is because the raising of interest rates, result in a decrease in total spending which is needed for production to increase ๐ธ๐ธ
- Decreased economic growth can increase unemployment ๐ธ๐ธ
- South Africa has been experiencing an increase in unemployment since the implementation of the policy in 2000 ๐ธ๐ธ
- Inflation targeting is difficult to implement when the cause of inflation is supply shocks ๐ธ๐ธ [Max. 10]
- A summary of what has been discussed without repeating facts already mentioned in the body. ๐ธ๐ธ
- An opinion or valued judgement on the facts discussed. ๐ธ๐ธ
- Additional support information to strengthen the discussion. ๐ธ๐ธ
- A contradictory viewpoint with motivation. ๐ธ๐ธ
- Recommendations. ๐ธ๐ธ
- E.g. Inflation can be a threat to the normal functioning of the economy; therefore, measures like monetary and fiscal are vital to keep the phenomenon under control. ๐ธ๐ธย
- This is the activities of people travelling to and staying in places outside their usual environment for a period not longer than one consecutive year for leisure, business and other purposes and not related to a remunerative activity from within the place visited ๐ธ๐ธ [Max 2]
BODY - MAIN PART Gross domestic product (GDP)
- Tourism impacts mostly on the services industry than on agriculture or manufacturing although there are upstream effects when agriculture provides foodstuffs to restaurants and manufacturing provides vehicles for transport ๐ธ๐ธ
Direct contribution on GDP
- Statistics South Africa (SSA) shows that in 2020 inbound tourists contributed R69 billion and domestic tourists R billion, amounting to R billion - about % of South Africa's GDP ๐ธ๐ธ
Indirect contribution on GDP
- If the indirect contribution is added, tourism add about % to GDP ๐ธ๐ธ
- The WTTC estimated that tourism contributed % to the GDP of the world economy in 2020๐ธ๐ธ
- In developing economies the service sector is responsible for around % of GDP, while it is responsible for more than % of GDP in developed economies ๐ธ๐ธ
- South Africa is similar to that of developed economies and services contributed more than % of GDP in 2020. ๐ธ๐ธ
- Tourism has a major effect on employment and this amounted to million workers in 2020๐ธ๐ธ
- Tourism is the worldโs largest generator of jobs ๐ธ๐ธ
- Tourism is labour intensive ๐ธ๐ธ
- More jobs can be created with every unit of capital invested in tourism than elsewhere
- Tourism employs many skills ๐ธ๐ธ
- It ranges from accountants and hairdressers to tour guides and trackers, ๐ธ๐ธ
- the tourism industry draws upon numerous skills ๐ธ๐ธ
- Tourism can provide immediate employment ๐ธ๐ธ
- If one quarter of touristsโ accommodation establishment in South Africa starts to offer live entertainment to quests, thousands of entertainers could be employed within days ๐ธ๐ธ
- Tourism provides entrepreneurship opportunities ๐ธ๐ธ
- The tourism industry accommodates informal sector enterprises, from craft and fruit vendors to pavement vendors, chair rentals ๐ธ๐ธ
- Tourism is widely recognized as one of the fastest and more effective redistribution mechanisms in development ๐ธ๐ธ
- It brings development to the poor in rural areas ๐ธ๐ธ
- Tourism provides an alternative to urbanisation, permitting women and youth to continue a rural family lifestyle while giving them business opportunities ๐ธ๐ธ
- E.g. to start and operate small-scale tourism businesses around community asserts (forests, parks and rivers) ๐ธ๐ธ
Externalities
- The rapidly expanding tourism industry could have both positive and negative impacts that extend well into the future ๐ธ๐ธ
- While tourism attracts large amount of revenue, it can also cause undue environmental damage that can harm the very foundation on which it depends ๐ธ๐ธ
- All other economic resources, tourism uses resources and produces wastes and also creates environmental costs (pollution) and benefits in the process ๐ธ๐ธ
- Rapid growth in tourism aiming at short-term benefits usually results in more negative effects and these includes the degeneration of traditions and cultural values and environmental damage to sites and setting ๐ธ๐ธ
Environment Tourism activities create environmental stress:
- Permanent environmental restructuring which includes major infrastructure ๐ธ๐ธ
- Waste product generation such as biological and non-biological waste that damages fish production ๐ธ๐ธ
- Direct environmental stress caused by tourist activities, e.g. the destruction of vegetation and dunes ๐ธ๐ธ
- Effects on population dynamics such as migration and increased urban densities ๐ธ๐ธ
- Transport infrastructure, e.g. roads, airports ๐ธ๐ธ
- Communication and infrastructure including telephone lines, electronic signal stations and radio, TVsโ ๐ธ๐ธ
- Energy infrastructure such electricity and liquid fuel ๐ธ๐ธ
- Basic service infrastructure such as clean water and sewerage systems ๐ธ๐ธ [Max. 26]
ADDITIONAL PART How can Indigenous Knowledge Systems be used to promote tourism in South Africa?
- More cultural villages can be improved to facilitate and promote tourism e.g. Shangana in Mpumalanga, Basotho in the Free State and Simunye Zulu Lodge in Kwazulu-Natal. ๐ธ๐ธ
- Where guides explain and demonstrate storytelling and indigenous knowledge practices. ๐ธ๐ธ
- Advertising campaigns domestically and internationally by travel agencies, hotels and B & B, lodges and SA Tourism can focus on promoting these heritage sites in brochures and fliers, social media. ๐ธ๐ธ
- These actions will make tourists more aware of these attractions ๐ธ๐ธ
- Encourage tourists to experience different cultures and townships - experience life at home with a household and eat at a shebeen or township restaurant ๐ธ๐ธ
- World Heritage Sites of South Africa can be promoted for their cultural significance e.g. the Fossil Hominid Sites of Sterkfontein, Mapungubwe Cultural Landscape, Richtersveld Cultural and Botanical Landscape, Vredefort Dome and Robben Island ๐ธ๐ธ
- Environmental World Heritage Sites of South Africa selected for their natural importance namely the Cape Floral Region Protected Areas, Isimangaliso Wetlands Park as well as uKhahlamba/Drakensberg Park which has been selected for its mixed significance ๐ธ๐ธ
- Arts and culture festivals e.g. the National Arts Festival, the Hermanus Festival, Awesome Africa Music Festival and Macufe African Cultural Festival should more widely be advertised to encourage tourists to attend ๐ธ๐ธ
- According to the World Health Organisation, a large majority of the African population make use of traditional medicines for health, social-cultural and economic reasons and forms part of the unique experience tourists experience when visiting local villages ๐ธ๐ธ
- In South Africa tourists are made more aware of the important role traditional medicine plays in poverty reduction and employment creation ๐ธ๐ธ
- Relaxation of restrictive tourist visa laws to facilitate easier entry into South Africa ๐ธ๐ธ [Accept any other relevant answers] [Max. 10]
- South Africa attracted over million tourists in 2020 /For every 8.1 additional tourist to South Africa, one new job is created/one per cent increase in tourism adds R million annually to the SA economy. ๐ธ๐ธ [Accept any other relevant higher order conclusion] [Max. 2]
- Tourism is the activities of people travelling to and staying in places outside their usual environment for no more than one consecutive year for leisure, business or other purposes PP ๐ธ๐ธย [Accept any other correct relevant response] [Max 2]
MAIN PART Business sector
- Tourism stimulates business in areas such as accommodation and entertainment ๐ธ๐ธ
- The construction industry, in private-public partnership with the government to provide the infrastructure, manufacturing sector and recreation sector all benefits from increased demand due to tourism ๐ธ๐ธ
- The previously disadvantaged communities get entrepreneurial opportunities through the black economic empowerment schemes ๐ธ๐ธ
- A large number of people get business opportunities in the informal sector e.g. selling of artefacts ๐ธ๐ธ
- Local retailers may have an increase in sales (and profits) because of increased demand from tourists ๐ธ๐ธ
- Private businesses and government work in partnership to provide the infrastructure needed for tourism ๐ธ๐ธ
- This increases the market share of and income of the these businesses ๐ธ๐ธ
- Allow existing businesses to improve the quality and variety of their products PP ๐ธ๐ธ
- Allow natural monopolies e.g. Table Mountain Cableway to achieve abnormal profits PP ๐ธ๐ธ
- The public sector also provides a range of financial incentives for private sector tourism investment (grants, subsidies, loans, tax rebates) PP ๐ธ๐ธ [Max 10]
Infrastructure development
- Adequate and well-maintained infrastructure is essential for tourist destinations PP. ๐ธ๐ธ
- Locals share this infrastructure with tourists ๐ธ๐ธ
- Government often prioritises economic infrastructure such as ports and beaches ๐ธ๐ธ
- In addition to physical and basic infrastructure, social infrastructure is also important for the growth of tourism๐ธ๐ธ
- Most of the SDIs and development corridors also have tourism as an important focus PP ๐ธ๐ธ [Max 8]
- Members of households earn income from the tourism sector as tour operators, travel agents etc. ๐ธ๐ธ
- Many households are indirectly involved in tourism as employees e.g. in hotels, transport sector. ๐ธ๐ธ
- Entrepreneurs from households that operate as curio producers or musicians can earn income from tourism . ๐ธ๐ธ
- A large number of households acquire skills in the tourism industry. ๐ธ๐ธ
- School curriculum and learnership offer opportunities to acquire these skills . ๐ธ๐ธ
- Encourages rural development because many tourist attractions are located in rural areas PP ๐ธ๐ธ [Accept any other correct relevant response] [Max. 26]
ADDITIONAL PART Tourism can be successfully marketed in less popular destinations by:
- advertising the firms' attractions in a variety of media including social media and internet which may reach both local and international potential tourists. ๐ธ๐ธ
- focusing on a clear message that concentrates on the strength of the attraction/ uniqueness of the destination. ๐ธ๐ธ
- using the indigenous knowledge systems of that particular area where possible PP. ๐ธ๐ธ
- describing the service offered in the best possible way to catch the interest of the likely tourist PP E.g. the use of slogans. ๐ธ๐ธ
- charging a price that is competitive and money well spent for the service offered. ๐ธ๐ธ
- helping the tourist to view the entire service as value for money โ deliver a worldclass visitor experience ๐ธ๐ธ
- highlighting other places of interest in the vicinity of the attraction as part of a package ๐ธ๐ธ
- focusing on proudly South African products/services / Shoโt Left campaign PP ๐ธ๐ธ
- help disadvantaged South Africans to benefit from tourist attractions in the less popular destinations PP ๐ธ๐ธ [Accept any other correct relevant response] [Max. 10]
CONCLUSION A weaker exchange rate has been a major contributing factor to South Africa's tourism industry growth over many years. ๐ธ๐ธ [Accept any correct relevant response] [Max 2]
INTRODUCTION Environmental sustainability can be defined as development that meets the need of the present without compromising the ability of future generations to meet their own needs. ๐ธ๐ธ
BODY: MAIN PART Public sector intervention Because it is difficult to enforce measures to ensure sustainability the government has to intervene. ๐ธ๐ธ
Environmental taxes Environmental taxes (green taxes) can be added to the cost of goods and services for the negative impact they have on the environment. ๐ธ๐ธ The government uses the income generated through these taxes to protect the environment. ๐ธ๐ธ Taxes can be imposed on petrol, paper, emission gases etc. ๐ธ๐ธ In 2003 the government has legislated the use of biodegradable plastic bags which consumers had to pay for๐ธ๐ธ The hope is that they will use fewer bags and ensure a litter free environment. ๐ธ๐ธ
Charging for dumping of waste A monthly fee as part of municipal accounts is charged for collection of waste, sewage and garbage. ๐ธ๐ธ Households already pay for the collection of rubbish. ๐ธ๐ธ The factory owner might clean up his waste if it cost him to dump it. ๐ธ๐ธ Industries might also pay for emitting gases that can be harmful to people and the environment. ๐ธ๐ธ Subsidies Subsidies can be awarded to businesses that are willing to reduce pollution and waste. ๐ธ๐ธ Waste can also be reduced by using new techniques or equipment such as solar energy. ๐ธ๐ธ Emission gases from factories can be reduced using new technology. ๐ธ๐ธ
Granting property rights Normally owners of properties tend to be more protective over their resources than users who are only interested in the profits the resources offer. ๐ธ๐ธ For this reason the government might grant property rights over a specific area. ๐ธ๐ธ Property rights empowers owners to negotiate contracts with businesses who wish to exploit the areaโs resources. ๐ธ๐ธ
Marketable permits A government can decide on the maximum desired level of pollution in an area. ๐ธ๐ธ It then distribute pollution rights (marketable permits) to factories within that area. ๐ธ๐ธ This means that each factory can pollute to a certain limit. ๐ธ๐ธ It means that marketable permits are licenses that polluters can buy or sell to meet the control levels set by government. ๐ธ๐ธ
Education Incorporating topics into the curriculum of school fosters awareness. ๐ธ๐ธ The public is gradually been made aware of this rising problem. ๐ธ๐ธ Plastic, bottles and cartons can be recycled or made biodegradable. ๐ธ๐ธ
Public sector control If the governmentโs intervention does not attain the desired results, then it has to intervene more directly by setting and enforcing limits. ๐ธ๐ธ
Environmental Impact Assessment In SA every projected construction, mining or similar development has to undergo an assessment by qualified environmental professionals. ๐ธ๐ธ To prove that it will not cause unwarranted environmental damage and that the damage can be repaired after construction. ๐ธ๐ธ The cost if built into the project. ๐ธ๐ธ
Command and Control Regulations that are set and enforce environmental limits or standards. ๐ธ๐ธ Quantity: e.g. set the limit to the amount of fish to catch, or limit the season catching certain species of fish. ๐ธ๐ธ Quality: e.g. drinking water quality is carefully monitored and controlled. ๐ธ๐ธ Air quality in workplace is subject to minimum standards. ๐ธ๐ธ Social effect: e.g. noxious fumes from factories, dumping of medical waste near settlements, and noise pollution. ๐ธ๐ธ
Voluntary agreements Agreements between government and businesses voluntarily to address negative environmental impacts of industries. ๐ธ๐ธ Businesses voluntary agree to decrease the emissions of pollutants. ๐ธ๐ธ Most prefer negotiations so that they can tailor their specific needs and include it into their planning๐ธ๐ธ Agreements can be formal, which is legally binding contract or informal. ๐ธ๐ธ [Max 26]
ADDITIONAL PART Government does not exercise effective control over the continuous dumping of waste because of a lack of coordination between departments. ๐ธ๐ธ The fines imposed on industries that dump waste are too lenient and they continue polluting the environment. ๐ธ๐ธ
The minimum standards set for hazardous gas and fuel emissions are not enforced or adjusted. ๐ธ๐ธ The recycling of waste materials are not widely encouraged and promoted and landfill sites are overflowing. ๐ธ๐ธ Government has various laws that is not really effectively implemented. ๐ธ๐ธ Poor service delivery also adds to the problem in certain areas. ๐ธ๐ธ [Accept any other relevant answer] [Max 10]
CONCLUSION Each and every individual, business and government needs to stand together to save our planet. [Accept any other relevant conclusion] [Max 2] Discuss in detail the following problems and the international measures taken to ensure sustainable development (Environmental Sustainability)
INTRODUCTION Environment refers to the physical surroundings and physical conditions that affect peopleโs lives. ๐ธ๐ธ The ever-increasing pressure on our environment originates from increasing population numbers and excessive consumption๐ธ๐ธ Our air, land, and water are under constant assault from the ever-growing ravages of man-made pollution generated chiefly by industrialized societies. ๐ธ๐ธ [Accept any appropriate introduction] [Max 2]
BODY-MAIN PART Conservation
- Conservation is necessary because human actions cause pollution and over-utilisation ofย ย resources. ๐ธ๐ธ
- Conservation is a strategy aimed at achieving the sustainable use and management of natural resources. ๐ธ๐ธ
- Conservation seeks a creative continuity of the environment while ensuring that change is sympathetic to the quality of life for both present and future generations. ๐ธ๐ธ
- Certain aspects of conservation need to be taken into account.
- Firstly, there is an opportunity cost. ๐ธ๐ธ
- Secondly, externalities are often present. ๐ธ๐ธ
- Lastly, self-interest has a short term horizon โ meaning that decisions cannot be left entirely to market forces. ๐ธ๐ธ
- Over utilization of resources causes a reduction in supply, increase in prices, contradiction of demand and a search for substitutes. ๐ธ๐ธ
- This necessitates conservation of both renewable and non-renewable resources. ๐ธ๐ธ
- Conservation has to be concerned with limiting what is harvested in order to maintain a stable stock at least at the minimum level. ๐ธ๐ธ
- Government can use permits and quotas as two possible direct control methods in order to maintain the stock of resources at the minimum level. ๐ธ๐ธ
Preservation
- Preservation involves any strategy undertaken to safeguard the environment, maintain its current condition and keep it as habitable as possible for people and animals. ๐ธ๐ธ
- Heritage sites, indigenous forests, specifies of animals etc. that have special cultural or environmental significance, are often targeted preservation. ๐ธ๐ธ
- Preservation is not likely to work as a private enterprise because the benefit to society is much bigger than the income of the producer. ๐ธ๐ธ
- It may be possible to use cost-benefit analysis to calculate the social benefits of preservation of the environment.
- The weaknesses in market solutions require the government to intervene in order to preserve environment assets. ๐ธ๐ธ
- Government could do any of the following:
- Buy or expropriate โ Environmental assets are simply closed for human use. ๐ธ๐ธ
- Subsidise-A subsidy would increase net benefits to the owner and raise the propertyโs present value. ๐ธ๐ธ
- Controls โ The government can compel the owner to apply control measures like restricting the quantities exploited or number of visitors allowed per day. ๐ธ๐ธ [26 Max]
ADDITIONAL PART Stockholm Conference (1972)
- The Stockholm Conference was the first major large scale international meeting on the environment convened with the support of the United Nations. ๐ธ๐ธ
- The meeting agreed upon a declaration containing 26 principles concerning the environment and development, an action plan with 109 recommendations and a resolution. ๐ธ๐ธ
- The meeting directly impacted on the environmental policies of many countries. ๐ธ๐ธ
Rio de Janeiro Earth Summit (1992)
- This meeting acknowledged the importance of cooperation in addressing environmental concerns that threaten sustainability. ๐ธ๐ธ
- The conference helped to make countries around the world aware of the dangers of unsustainable development. ๐ธ๐ธ
- Unfortunately the principles outlined and accepted at the summit were not binding and subsequently many countries did not confirm to them. ๐ธ๐ธ
Rio + 5 (1997)
- This conference noted that globalization made some countries poorer โ ๐ธ๐ธ
- In particular African countries and the least developed countries showed a low level of growth or even declined. ๐ธ๐ธ
Kyoto Protocol for Climate Change (1997)
- Countries committed themselves to reducing their total emissions of greenhouse by 5 %.๐ธ๐ธ
- Unfortunately, China was excluded from this agreement and the USA withdrew. ๐ธ๐ธ
World Summit on Sustainable Development (2002)
- The objective of this summit held in Johannesburg was to conserve natural resources in a world that is growing in population. ๐ธ๐ธ
- The meeting focused on issues like poverty eradication, water and sanitation, energy, health agriculture and biodiversity. ๐ธ๐ธ
COP 17 (2011)
- The main goal of the conference held in Durban was to establish a treaty to limit carbon emissions and plan strategies to keep global temperature rise to less than 2 degree Celsius in the 21st Century. ๐ธ๐ธ
- Although the framework for this treaty was established it was not finalised. ๐ธ๐ธ
- The solution to our environmental problems will depend on our ability to make sound economic decisions that take account of the natural environment and to change our individual behaviour and attitudes. ๐ธ๐ธ [Accept any other relevant conclusion] [Max 2]
Related items
- Mathematics Grade 12 Investigation 2023 Term 1
- TECHNICAL SCIENCES PAPER 2 GRADE 12 QUESTIONS - NSC PAST PAPERS AND MEMOS JUNE 2022
- TECHNICAL SCIENCES PAPER 1 GRADE 12 QUESTIONS - NSC PAST PAPERS AND MEMOS JUNE 2022
- MATHEMATICS LITERACY PAPER 2 GRADE 12 MEMORANDUM - NSC PAST PAPERS AND MEMOS JUNE 2022
- MATHEMATICS LITERACY PAPER 2 GRADE 12 QUESTIONS - NSC PAST PAPERS AND MEMOS JUNE 2022
Is my essay writer skilled enough for my draft?
- Password reminder
- Registration
Customer Reviews
Finish Your Essay Today! EssayBot Suggests Best Contents and Helps You Write. No Plagiarism!
Finished Papers
Finished Papers
How do I place an order with your paper writing service?
Advanced essay writer, need an essay writer for me connect now.
Feeling tired to write drafts on your own or you do not have ample ideas to write with? Be it anything, our writers are here to assist you with the best essay writing service. With our service, you will save a lot of time and get recognition for the academic assignments you are given to write. This will give you ample time to relax as well. Let our experts write for you. With their years of experience in this domain and the knowledge from higher levels of education, the experts can do brilliant essay writing even with strict deadlines. They will get you remarkable remarks on the standard of the academic draft that you will write with us.
Final dates! Join the tutor2u subject teams in London for a day of exam technique and revision at the cinema. Learn more →
Reference Library
Collections
- See what's new
- All Resources
- Student Resources
- Assessment Resources
- Teaching Resources
- CPD Courses
- Livestreams
Study notes, videos, interactive activities and more!
Economics news, insights and enrichment
Currated collections of free resources
Browse resources by topic
- All Economics Resources
Resource Selections
Currated lists of resources
Study Notes
3.4.4 Oligopoly (Edexcel)
Last updated 20 Sept 2023
- Share on Facebook
- Share on Twitter
- Share by Email
This Edexcel study note covers Oligopoly
a) Characteristics of Oligopoly:
- High Barriers to Entry and Exit: Oligopolistic markets often have significant barriers that prevent new firms from entering the industry or existing firms from easily exiting. These barriers can include high capital requirements, economies of scale, patents, and government regulations.
- High Concentration Ratio: Oligopolies are characterized by a small number of large firms dominating the market. The concentration ratio measures the market share held by the largest firms in the industry, and in oligopolistic markets, this ratio is typically high.
- Interdependence of Firms: Oligopolistic firms are highly aware of the actions and decisions of their competitors. They must consider how their own choices, such as pricing and marketing strategies, will affect the behavior and reactions of rival firms.
- Product Differentiation: Oligopolistic firms often engage in product differentiation to distinguish their offerings from competitors. This can include branding, quality variations, and advertising to create brand loyalty.
b) Calculation of n-Firm Concentration Ratios and Their Significance:
The n-firm concentration ratio measures the combined market share of the largest n firms in an industry. It is calculated by summing the market shares of these firms. Significance:
- Higher concentration ratios indicate a more concentrated industry with fewer dominant firms.
- Lower concentration ratios suggest a more competitive industry with a greater number of smaller firms.
- It can provide insights into the degree of market power held by the largest firms and potential antitrust concerns.
c) Reasons for Collusive and Non-Collusive Behavior: Collusive Behavior:
- Maintaining High Prices: Firms in an oligopoly may collude to set high prices and limit competition, increasing their profits collectively.
- Stability: Collusion can provide market stability, reducing uncertainty for firms and consumers.
- Avoiding Price Wars: Collusion helps firms avoid destructive price wars.
Non-Collusive Behavior:
- Competition: Firms may choose to compete aggressively to gain market share and increase profits individually.
- Legal Constraints: Antitrust laws and regulations prohibit collusion, encouraging firms to compete independently.
- Differences in Objectives: Firms may have differing goals and incentives that make collusion difficult.
d) Overt and Tacit Collusion; Cartels and Price Leadership:
- Overt Collusion: Occurs when firms openly agree to cooperate and set prices or output levels. This can lead to the formation of cartels, which are explicit agreements among firms to coordinate their actions.
- Tacit Collusion: Involves firms behaving in a manner that resembles collusion without any explicit agreement. Firms may follow observed pricing patterns set by competitors or engage in price leadership, where one dominant firm sets the price and others follow suit.
e) Prisoner's Dilemma in a Two-Firm Model:
The prisoner's dilemma is a classic game theory scenario where two rational players, in this case, two firms, make decisions that result in suboptimal outcomes. In an oligopolistic context, if both firms choose to compete aggressively, they may trigger a price war and both suffer lower profits. However, if both firms collude and set high prices, they both earn higher profits. The dilemma arises because each firm has an incentive to betray the collusion agreement to gain a larger share of the profits, but if both firms do this, they both end up worse off.
f) Types of Price Competition:
- Price Wars: Fierce competition where firms continuously lower prices to gain market share, often resulting in reduced profits for all.
- Predatory Pricing: Occurs when a firm sets very low prices with the intent of driving competitors out of the market, after which it can raise prices.
- Limit Pricing: A strategy where a dominant firm sets prices low enough to discourage new entrants from the market.
g) Types of Non-Price Competition:
- Product Differentiation: Firms emphasize the unique qualities and features of their products through branding, quality, design, or advertising.
- Advertising and Marketing: Firms engage in extensive advertising and marketing campaigns to create brand loyalty and awareness.
- Innovation: Competing through the development of new products, technologies, or processes.
- Customer Service: Offering exceptional customer service and support as a competitive advantage.
- Distribution Channels: Establishing efficient distribution networks to reach customers faster and more conveniently.
Download this PowerPoint
- Kinked Demand Curve
- Non-Price Competition
You might also like
Oligopoly revision quiz.
Quizzes & Activities
Classroom Activity: The Oligopoly Game
2nd October 2012
UK Taxi Wars are Hotting Up
24th October 2014
What is Market Concentration?
Monopolistic competition, revenues and profits in the uk cinema industry, competition & monopoly revision quiz, sports direct to open a new gym chain.
12th November 2014
Our subjects
- โบ Criminology
- โบ Economics
- โบ Geography
- โบ Health & Social Care
- โบ Psychology
- โบ Sociology
- โบ Teaching & learning resources
- โบ Student revision workshops
- โบ Online student courses
- โบ CPD for teachers
- โบ Livestreams
- โบ Teaching jobs
Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885
- โบ Contact us
- โบ Terms of use
- โบ Privacy & cookies
© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.
Customer Reviews
Finished Papers
Courtney Lees
Article Sample
- bee movie script
- hills like white elephants
- rosewood movie
- albert bandura
- young goodman brown
Know Us Better
- Knowledge Base
- Referencing Styles
- Know Our Consultance
- Revision and Refund Policy
- Terms Of Use
IMAGES
VIDEO
COMMENTS
Here is a compilation of essays on 'Oligopoly' for class 9, 10, 11 and 12. Find paragraphs, long and short essays on 'Oligopoly' especially written for school and college students. Essay on Oligopoly Essay Contents: Essay on the Introduction to Oligopoly Essay on the Characteristics of Oligopoly Essay on the Scope of Study of Oligopoly Essay on the Models of Oligopoly Essay on the ...
The main features of oligopoly. An industry which is dominated by a few firms. The UK definition of an oligopoly is a five-firm concentration ratio of more than 50% (this means the five biggest firms have more than 50% of the total market share) The above industry (UK petrol) is an example of an oligopoly. See also: Concentration ratios.
Here is what I feel is a superbly clear and well-structured essay answer to a question on the economic and social effects of collusion within an oligopoly. Question. Evaluate the view that collusion between firms in an oligopoly always works against consumer and society's interests. Use game theory in your answer. KAA 1:
How firms in Oligopoly compete. 28 November 2016 by Tejvan Pettinger. Oligopoly is a market structure in which a few firms dominate the industry; it is an industry with a five firm concentration ratio of greater than 50%. In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave:
An Oligopoly is a market structure where only a few sellers dominate the market. Because there are only a few firms (players) in an Oligopoly, they tend to be highly interdependent of one another - meaning they will take in account each others' actions when trying to compete in the market. Another characteristic is these markets also ...
Figure 1: The enduring impact of some key oligopoly papers in trade B&S 1985 B&K 1983 E&G 1986 S&B 1983 0 50 100 150 Google cites per year 1985 1995 2005 2015 Figure 1 depicts annual citations for four seminal papers that gave a central role to oligopoly and trade: B&K 1983 "A 'reciprocal dumping' model of international trade," S&B 1983 ...
Evaluate the tradeoffs of imperfect competition. Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry.
This category ranges from perfect competition to an oligopoly. Medium concentration. 40% to 70%. An industry in this range is likely an oligopoly. High concentration. 70% to 100%. This category ranges from an oligopoly to monopoly. Total concentration. 100% means an extremely concentrated oligopoly. If for example CR 1 = 100%, there is a monopoly.
Oligopoly is a market structure in which a small number of firms has the large majority of market share . An oligopoly is similar to a monopoly , except that rather than one firm, two or more ...
Review related articles/videos. Report a problem. Do 4 problems. Learn for free about math, art, computer programming, economics, physics, chemistry, biology, medicine, finance, history, and more. Khan Academy is a nonprofit with the mission of providing a free, world-class education for anyone, anywhere.
Here is an essay plan for the following title: "Evaluate the degree to which oligopolistic markets will result in collusion." Revision Video - Oligopoly and Collusion The US division of French bank BNP Paribas has pleaded guilty to a price fixing conspiracy, agreeing to pay $90m.
Defining and measuring oligopoly. An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market. Some examples of oligopolies include the car industry ...
Suppliers and sellers in an oligopoly can command higher prices than companies in a competitive market, ... In 2015, the four major airlines controlled 80% of the U.S. market, the Page One Economics essay said. Three manufacturers have more than 90% of the global insulin market, according to a July 2022 press release from Grand View Research, a ...
An oligopoly is a market dominated by a few producers, each of which has control over the market. ... 4.1.5.5 Oligopoly (AQA A Level Economics Teaching Powerpoint) Teaching PowerPoints. 3.4.4 Oligopoly - Introduction (Edexcel A-Level Economics Teaching PowerPoint) ... Essay on Oligopoly and Collusion Exam Support. Price Wars in Oligopoly ...
The contribution of this article is to show how such dual relationships are possible in theory along with providing an empirical method to help identify price-leadership structures in n -firm oligopoly. As an illustration, we apply the method to British supermarkets and find a three-tier leader-follower structure. JEL.
10.2 Oligopoly. Learning Objectives. By the end of this section, you will be able to: Explain why and how oligopolies exist. Contrast collusion and competition. Interpret and analyze the prisoner's dilemma diagram. Evaluate the tradeoffs of imperfect competition. Many purchases that individuals make at the retail level are produced in markets ...
Grade 12 Economic Essays for the Next Three-Year Cycle (2021-2023) Macroeconomics - Paper 1 Discuss in detail the markets within the FOUR-SECTOR model (Circular Flow) ... The oligopoly is a type of imperfect market in which only a few large producers dominate the market. ๐ธ๐ธ ...
Daniel Kahneman, the Eugene Higgins Professor of Psychology, Emeritus, professor of psychology and public affairs, emeritus, and a Nobel laureate in economics whose groundbreaking behavioral science research changed our understanding of how people think and make decisions, died on March 27. He was 90. Kahneman joined the Princeton University faculty in 1993, following appointments at Hebrew ...
Try EssayBot which is your professional essay typer. EssayBot is an essay writing assistant powered by Artificial Intelligence (AI). Given the title and prompt, EssayBot helps you find inspirational sources, suggest and paraphrase sentences, as well as generate and complete sentences using AI. If your essay will run through a plagiarism checker ...
The second you place your "write an essay for me" request, numerous writers will be bidding on your work. It is up to you to choose the right specialist for your task. ... Oligopoly Economics Essay, Best Cheap Essay Ghostwriting Site For Mba, International Relations Thesis Topics Examples, Navy Core Value Essay, Scotland Research Paper Topics ...
This Edexcel study note covers Oligopoly. a) Characteristics of Oligopoly: High Barriers to Entry and Exit: Oligopolistic markets often have significant barriers that prevent new firms from entering the industry or existing firms from easily exiting. These barriers can include high capital requirements, economies of scale, patents, and ...
Economics Oligopoly Essay, Dante Alighieri Critical Essays, Help With My Esl Critical Analysis Essay On Donald Trump, Top Content Writing Site Usa, Quality Essay Uk, Ap Literature 2005 Sample Essays, Professional Creative Essay Ghostwriter For Hire For School 4.9/5
Oligopoly Economics Essay, Cover Letter Sample Email Format, Essay On Bad Eating Habits, Fanfic Spacebattles Creative Writing, Article 370 Of The Constitution Of India Essay, Cover Letter For Fresh It Graduate, The Cat Person Essay ...
Working Papers; Grassroots Design Meets Grassroots Innovation: Rural Design Orientation and Firm Performance. March 2024 Written by: ... Family Resources and Human Capital in Economic Downturns. March 2024. Author GARRETT ANSTREICHER. Working Paper Number CES-24-15.
After getting 'my' initial draft in hand, you can go for unlimited revisions for free, in case you are not satisfied with any content of the draft. We will be constantly there by your side and will provide you with every kind of assistance with our best essay writing service. ID 11550. 1217Orders prepared.
This letter updates the assessment of Mongolia's economic conditions since the conclusion of the IMF's 2023 Article IV consultation on September 14, 2023. The assessment has been requested in relation to the program loan under the Asian Development Bank's Policy Based Lending modality.