The Theory of Oligopolies - Chapter 5
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- Created on: 16-11-15 10:20
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- The Theory of Oligopoly
- Chapter 5
- Barriers to entry:
- Research & Development
- Firms use this to create products which give them an edge over competitors
- Branding
- Manufacturers stress that their brands have unique characteristics
- Multiplicity of brands
- Large firms have the ability to stock multiple brands
- more choice and caters to consumers who brand switch
- Large firms have the ability to stock multiple brands
- Integration
- Oligopolists can integrate - allows them to use their size and EoS to limit pricing
- Predatory pricing
- Setting a price which may bankrupt a competitor
- Advertising
- Large firms can spread FC of advertising across many units - lowers the unit cost
- Non- price competition
- i.e. loyalty cards or BOGOF
- Research & Development
- Pricing techniques
- Transfer pricing
- i.e. a parent company in a high tax country opening a subsidiary firm in a lower tax country
- The parent firm pays the other firm (transfer pricing) to use their intellectual property
- So less funds are being taxed overall as the parent firm is paying less tax
- 3
- 2
- So less funds are being taxed overall as the parent firm is paying less tax
- 1
- The parent firm pays the other firm (transfer pricing) to use their intellectual property
- i.e. Amazon and Starbucks
- i.e. a parent company in a high tax country opening a subsidiary firm in a lower tax country
- Cost plus pricing
- When a firm adds a mark up to average cost i.e. 50%
- The diagram suggests that firms may find it easier to carry out cost plus pricing once it has achieved the MES (as costs are fairly constant)
- Popular in retail industry i.e. bridal dresses (200%)
- BUT does not take into account the elasticity of the product
- Transfer pricing
- Assumptions
- Product branding
- Product differentiation
- Entry barriers
- Maintains supernormal profits for dominant firms
- Interdependent decision making
- Must take into account the likely reaction of rivals to changes in price and output
- Non-price competition
- Product branding
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