EconomicsNotes

The theory of oligopoly is focussed on a stable market in which a few large firms dominate the supply of items and can have power over price or supply. This may be because of economies of scale or high barriers to entry. Barriers to entry can include sunk costs, legal and regulatory protections and requirements such as patents or performance rules, and resource availability. Within such a market, the theory assumes that the Demand curve for the individual firms corresponds to their Average revenue curves. These lines are ‘kinked.’ This means that the AR is inelastic and stable below a certain price point, because customers are not purchasing below the kink based on price, and elastic above the point, because the customers are price sensitive. Very few oligopoly models assume that the AR line is vertical below the kink, which means that there is some scope for different prices at different levels of output. Given that customers are highly inelastic, any price cuts would nevertheless...

  There are a variety of policies which authorities could use to intervene when the market fails (that is, when the market price does not reflect the 'true' cost or benefit of a good or service, and where the price mechanism cannot therefore work.)  Different policies are suited to different failures. Below, I have set out the types of intervention, and then suggested which situations they fit. Type of Government Intervention Market Failures which the intervention is directed at Examples Indirect Taxation Indirect taxes function well to raise the price and lower the supply of a demerit good. They punish producers and discourage demand where demand is inelastic, and make the consumers pay for externalities when the consumer is inelastic. They are therefore widely used to cope with negative production and consumption externalities, though they may be subject to various forms of government failure. ...