Oligopoly | A-Level Economics Notes
These revision notes cover everything you need to know about Oligopolies for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is an oligopoly?
An oligopoly is a market structure dominated by a few large firms.
Oligopolistic markets usually consist of:
- high barriers to entry and exit
- some degree of product differentiation
Oligopolies can vary in terms of their characteristics and their conduct.
Kinked demand curve diagram (AQA only)
The kinked demand curve shows the outcome in a competitive oligopoly.
The kinked demand curve explains that consumers can expect stable prices in a non-collusive oligopoly.
Firms are unlikely to raise prices because other firms will keep prices lower; so demand will fall by a much greater proportion.
Firms are unlikely to reduce prices because other firms will also reduce prices; so demand will increase by a much smaller proportion.
Firms compete on non-price factors instead e.g. loyalty cards.
Two-firm, two-outcome model (Edexcel only)
This model shows that the safe option is for each firm to set a low price. The model also shows that it is beneficial for both firms to agree to simultaneously set high prices, as it allows them both to generate greater profits.
What is collusion?
Collusion is when two or more firms agree to set high prices.
This is more likely to be possible if the two firms have a high market share and a similar market share.
After colluding, they act as a monopoly with their combined market share.
What is tacit collusion?
Tacit collusion is an informal agreement between firms to set higher prices.
What is overt collusion?
Overt collusion is an formal agreement between firms to set higher prices.