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Economics Hl

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Economics Hl
1. (a) Explain how a firm operating in an oligopolistic market might attempt to increase its market share.

Oligopoly: A market or an industry dominated by a few firms
The key point in Oligopoly is that whether the number of the firms in the industry is big or small, a large proportion of the market/industry’s output is shared by just a small number of firms. The number of ‘a few’ firms that dominate the market varies depending on the sections of industry. For example 90% of petrol sold in a country is accounted for by four large chains of petrol stations.
Market power can be measured in various ways - including the market share taken by each of the leading businesses in the market; and the capability of firms to make abnormal or supernormal profits in the long run. Barriers to entry allow producers to prevent the successful entry of new producers into the market. The concentration of market power within an oligopoly can be measured by the concentration ratio. The five-firm concentration ratio measures the combined market share of the leading five firms in the market. If two businesses take most of the industry's demand, the market can be described as a duopoly.
Non-price competition:
• Spending on advertising and marketing to create and develop brand loyalty among consumers. If successful this increases a firm's market share and makes the demand for individual product ranges more inelastic. Consumer's become less sensitive to price changes if they tend to consume products habitually. Persuasive advertising seeks to change consumer preferences and may have the impact of distorting consumer preferences by changing the perceived utility or satisfaction from consuming a product.
• Consumer loyalty cards; Online shopping and home delivery
• Twenty-four opening hours and Guaranteed after-sales service
Price competition
Price wars are a common characteristic of oligopolies. Firms may move away from short-term profit maximisation in an attempt to improve cash

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