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Some Telecoms’ analysts believe the main mobile operators in Ireland – Vodafone, O2, Meteor and 3 – control an oligopoly and have little reason to make the market really competitive - Leaving Cert Economics - Question 2 - 2011
Question 2
Some Telecoms’ analysts believe the main mobile operators in Ireland – Vodafone, O2, Meteor and 3 – control an oligopoly and have little reason to make the market re... show full transcript
Worked Solution & Example Answer:Some Telecoms’ analysts believe the main mobile operators in Ireland – Vodafone, O2, Meteor and 3 – control an oligopoly and have little reason to make the market really competitive - Leaving Cert Economics - Question 2 - 2011
Step 1
Outline three key features of an oligopolistic market.
Answer
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Few Sellers in the Industry: An oligopolistic market is characterized by a small number of firms, each of which can influence the price and output of the commodity. This limited competition often leads to market control.
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Interdependence Between Firms: Firms in an oligopoly are not independent; they must consider the potential reactions of competitors when making decisions about pricing and output. This interdependence often results in rigid pricing among firms.
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Barriers to Entry: High barriers exist for new firms attempting to enter the market, such as significant initial investment costs, access to distribution channels, and brand loyalty. This prevents competition from destabilizing the market.
Step 2
Outline two objectives firms in oligopoly may have, other than achieving the maximum level of profits.
Answer
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Prevent Government Intervention: Firms may engage in pricing strategies that avoid attracting regulatory scrutiny, thereby maintaining their market position without interference.
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Maximization of Sales/Market Share: Firms may focus on increasing their market share rather than simply maximizing profits, as a larger market presence can lead to greater long-term profitability and stability.
Step 3
Explain the shape of the ‘kinked’ demand curve facing a firm in oligopoly.
Answer
The ‘kinked’ demand curve consists of two segments: an elastic portion (AB) and an inelastic portion (BC).
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Elastic Segment (AB): If the firm raises its price, other firms are likely to keep their prices stable, leading to a significant loss of customers as consumers switch to competitors. This results in a steep drop in demand.
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Inelastic Segment (BC): Conversely, if the firm lowers its price, competitors will follow suit, leading to only a modest increase in quantity demanded. This rigidity implies that the demand curve has a kink where the two segments meet, causing the firm to be cautious about changing prices.
Step 4
Explain the long run equilibrium position of this firm.
Answer
The long run equilibrium occurs at point G where marginal cost (MC) equals marginal revenue (MR) and MC is rising. At this point:
- The firm's output level is Q1, where it sets its price at P1.
- The cost of production is shown at point G, where average cost (AC) also intersects the MC.
- If demand were to shift, the firm must remain positioned at P1 to maintain its market advantage without losing its competitive edge, maintaining equilibrium over the long run.
Step 5
Explain two reasons why consumers may prefer price competition.
Answer
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Lower Prices/Value for Money: Consumers benefit from lower prices which allows them to maximize their utility. Price competition encourages firms to offer commodities at more affordable rates, enhancing their purchasing power.
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Higher Disposable Income: By engaging in price competition, consumers have more disposable income after necessary expenses, allowing them choices on how to allocate their remaining finances for other goods or savings.
Step 6
Describe two benefits to consumers of non-price competition.
Answer
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Better Quality and Services: Customers often receive improved quality in products and services as firms seek to differentiate themselves through non-price competitive strategies, resulting in enhanced consumer satisfaction.
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Consumer Loyalty Programs: Firms may implement loyalty programs that reward repeat customers with discounts or points redeemable for products, providing additional value and incentives for consumers to remain loyal to a particular brand.