Oligopoly | A-Level Economics Notes
These revision notes cover everything you need to know about Oligopoly 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 firms.
Oligopolistic markets consist of:
- High barriers to entry and exit
- Interdependence of firms
- Product differentiation
Oligopolies can vary in terms of the way they conduct themselves. They can be collusive or non-collusive.
Draw a simple game theory model
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.
Use game theory to explain the reasons for collusive behaviour
- If we assume that Firm A sets a high price, Firm B would undercut them and set a low price. This would lead to the highest profit of 400 units.
- If Firm A expects Firm B to set a low price, Firm A would match them as they don't want to lose market share or lose out on supernormal profit.
- As a result, lower prices are the most likely outcome in an oligopoly (Nash Equilibrium).
- Firms could agree to set high prices through tacit collusion. This requires trust but it would allow the firms to make £10m profit each.