AQA A-Level Economics (7136) · Competitive & Concentrated Markets
Specification points
- The characteristics of oligopoly and the concentration ratio.
- Collusive and non-collusive behaviour; game theory.
- Price and non-price competition; contestable markets.
Characteristics of oligopoly
An oligopoly is a market dominated by a few large firms, with high barriers to entry and interdependence — each firm's decisions depend on rivals' likely reactions. The concentration ratio measures the combined market share of the largest firms.
Collusion and game theory
- Collusion (a cartel) — firms cooperate to fix prices or output, acting like a monopoly; illegal in most countries.
- Non-collusive — firms compete, sometimes in price wars.
Game theory and the prisoner's dilemma show why firms may not cut prices (fear of retaliation) yet are tempted to cheat on a cartel. The kinked demand curve model explains why oligopoly prices are often stable.
Interdependence + fear of price wars → stable prices and non-price competition; the temptation to cheat destabilises cartels.
Key definitions
| Term | Definition |
|---|---|
| Oligopoly | A market dominated by a few interdependent firms. |
| Collusion | Firms cooperating to fix prices or restrict output. |
| Concentration ratio | The combined market share of the largest firms. |
| Contestable market | A market disciplined by the threat of entry. |
Competition in oligopoly
- Price competition — price wars, predatory or limit pricing.
- Non-price competition — advertising, branding, loyalty schemes, quality and service.
Contestable markets
In a contestable market, low barriers and few sunk costs mean the threat of entry keeps incumbents' prices and profits low, regardless of the number of firms.
Worked example
Two supermarket chains dominate a region (oligopoly). Each fears a price war (prisoner's dilemma), so prices stay stable and they compete through loyalty cards and advertising instead. If entry were easy (a contestable market), they would keep prices low to deter new rivals.
Common exam mistakes
- Assuming oligopolies always have high prices — interdependence often stabilises them.
- Confusing collusion (cooperation) with competition.
- Ignoring contestability.
Exam technique
Use game theory and the kinked demand curve to explain price stability, and evaluate outcomes using collusion incentives and contestability.
Quick revision
- Oligopoly: few firms, high barriers, interdependence.
- Collusion vs competition; prisoner's dilemma; kinked demand.
- Contestability: threat of entry disciplines firms.