OCR A Level Economics: Oligopoly, interdependence and concentration ratios (H460) – Revision Notes

Quick recall for the oligopoly statements in OCR A Level Economics (H460), specification Version 3.0 (June 2026), under Market structures in Component 01, Microeconomics. Longer explanations and worked examples are in the study guide. Try the practice questions, then find gaps with the course hub, the checklist and the free diagnostics. The OCR microeconomics notes cover the wider component.

Every firm and number here is made up for teaching.

Key definitions

Term	Meaning
Oligopoly	A market shared by a few big sellers whose choices affect one another
Interdependence	One firm’s best action depends on how rivals respond
Non-price competition	Rivalry by branding, quality, service, innovation or loyalty rather than price
Collusion	Cooperation to limit competition, formal (cartel) or tacit (price leadership)
Dominant strategy	A choice that is best whatever the rival does
Nash equilibrium	Neither player can gain by changing alone, given the other’s choice
Concentration ratio (CRn)	Combined market share of the n largest firms
Product differentiation	Making a product distinct through features, design, brand or service

Characteristics of oligopoly

• Few large firms; high concentration
• High barriers to entry and exit
• Interdependence
• Differentiated (or sometimes identical) products
• Collusion possible
• Price stability; non-price competition

Interdependence: game theory

Method for reading a pay-off matrix:

1. Fix the rival’s choice and find your best reply. Repeat for the rival’s other choice.
2. If one choice wins in both cases, it is a dominant strategy.
3. A Nash equilibrium is a cell where both are playing a best reply.
4. Compare it with the best joint outcome. If they differ, there is a dilemma.

Reminder (profits in £m, invented; A first, B second):

	B: High	B: Low
A: High	15, 15	4, 21
A: Low	21, 4	9, 9

Low is dominant for both. Nash equilibrium: Low/Low (9, 9), total 18. Best joint: High/High (15, 15), total 30.

A second type of game: if A earns −3, 12, 2, 5 and B earns −3, 2, 12, 5 across the four cells (Launch/Launch, Launch/Stay, Stay/Launch, Stay/Stay), neither player has a dominant strategy. There are two Nash equilibria: one firm launches while the other stays out. Which one occurs depends on who commits first.

Points to remember:

• Explains price wars and why collusion is unstable: either firm gains by cheating (15 to 21).
• Repeated games can support cooperation, because cheating can be punished.
• Some games have no dominant strategy and have more than one Nash equilibrium.
• Limit: real firms have imperfect information, and the payoffs are estimates.

Interdependence: kinked demand curve

• Price rise: rivals stay put, so demand above the kink is elastic.
• Price cut: rivals match, so demand below the kink is inelastic.
• MR has a vertical gap at the kink output.
• If MC cuts MR in the gap, price and output do not change.

Price
 |\  elastic
 | \
 P* + - K
 |    \ \
 |     \  \  inelastic
 | MR gap |
 +--------+---- Quantity

Reminder figures: kink at 1,000 units and £8. Upper MR is £4 and lower MR is −£2 there, so any MC from −2 to 4 gives the same price. Elasticity: 2.0 above, 0.8 below.

Evaluation of the model:

• Explains price stickiness and why non-price competition is used.
• Silent on how the starting price arose.
• Rivals’ reactions are assumed, not always seen in practice.
• Prices do change; price wars occur; a big cost rise (MC outside the gap) moves price.

Types of collusion

Type	Example	Features
Formal (overt)	Cartel agreeing price or quota	Clear, but easy for authorities to detect
Tacit (informal)	Price leadership, following a convention	Hard to prove

Why cartels fail: each member can gain by cheating, and cheating is hard to detect with many firms.

Reminder numbers: demand P = 96 − Q, MC = £24. Monopoly outcome Q = 36, P = £60, profit 1,296, so four firms get 324 each. One firm cheats at 13: price £56, cheat earns 416, others 288 each.

Conditions that help collusion: few firms, similar products, stable demand, barriers to entry, easy monitoring.

Non-price competition and differentiation

• Forms: advertising, branding, quality, design, after-sales service, loyalty schemes, delivery, innovation.
• Why: price cuts are copied quickly, while brand loyalty is not.
• Effects: demand becomes less elastic; entry is harder; choice may rise; costs may rise.
• Break-even test for a campaign: extra units needed = campaign cost ÷ contribution per unit. Reminder: £280,000 ÷ £4 = 70,000 extra units.

Advantages and disadvantages of oligopoly

Advantages	Disadvantages
Economies of scale	Price above MC: allocative inefficiency
Funds for research and innovation (dynamic efficiency)	Higher prices if firms collude
Price stability	Barriers to entry protect profit
Quality competition and choice	Wasteful advertising; possible X-inefficiency

Diagram in words: price at the kink is above MC; AR may exceed AC (supernormal profit); output below the lowest point of AC.

Evaluate with: degree of rivalry, threat of entry, use of profits, regulation, time period.

Concentration ratios

CRn = (sales of the top n firms added together ÷ whole-market sales) × 100

Method in steps:

1. Find total market sales (include all small sellers).
2. Rank firms from largest down.
3. Add the top n and divide by the total.
4. State the answer as a percentage and give n.

Reminder: sales £m: 88, 74, 61, 47, 30, 22, others 78; total 400. CR3 = 223 ÷ 400 = 55.75%. CR4 = 67.5%. If the third and fourth firms merge (108), CR3 = 270 ÷ 400 = 67.5%.

Uses and limits:

• A high ratio suggests market power; a rising ratio suggests growing concentration.
• Depends on how the market is defined (local or national).
• Ignores foreign rivals and the split among leaders.
• Says nothing about how contestable the market is.

Comparing the four structures

	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Firms	Very many	Many	Few	One
Product	Identical	Differentiated	Often differentiated	Unique
Entry barriers	None	Low	High	Very high
Long-run profit	Normal	Normal	Supernormal possible	Supernormal possible
Allocative efficiency	P = MC	P > MC	Usually P > MC	P > MC
Productive efficiency	Yes, long run	No: excess capacity	Not guaranteed	Not guaranteed

Reminder numbers: demand P = 96 − Q, MC = £24. Competitive: Q = 72, P = £24. Monopoly: Q = 36, P = £60. Deadweight loss = ½ × 36 × 36 = 648.

Firm-level reminder (invented): TC = 100 + 10q + 0.1q², long-run demand AR = 20 − 0.15q. At q = 20, AC = 17 = AR, so profit is normal. MR = MC = 14, so P − MC = 3. Lowest AC is £16.32 at q = 31.6, so excess capacity is about 11.6 units. The comparison with perfect competition: the competitive firm produces at the lowest AC and charges P = MC.

Diagram prompts to practise: long-run perfect competition (price at minimum AC); long-run monopolistic competition (demand tangent to AC, left of minimum AC); monopoly (MR = MC, price read up to AR); oligopoly (kinked demand).

Evaluating the theory of the firm

Supports the theory	Challenges it
Gives benchmarks such as P = MC	Firms pursue growth, sales or satisficing, not only profit
Predicts entry when profits are high	Principal-agent problem: owners and managers differ
Explains price rigidity and non-price rivalry	Real firms rarely know MC and MR
	Markets are hard to fit into four boxes

Judgement frame: it is a useful benchmark, strongest where firms are profit-driven and markets stable, weaker where objectives are mixed. Always give an example.

Quick self-test

1. State two characteristics of oligopoly.
2. Why is demand elastic above the kink?
3. In the pay-off matrix above, why is Low a dominant strategy for A?
4. A market has total sales £500m. The four largest firms sell £120m, £90m, £80m and £60m. Calculate CR4.
5. Give one reason why a cartel is unstable.
6. In the kinked model, MC rises from £2 to £3 and stays within the MR gap. What happens to price?
7. State one limitation of a concentration ratio.
8. Under perfect competition (demand P = 96 − Q, MC = £24), what are price and output?
9. Define a Nash equilibrium.
10. Give one advantage and one disadvantage of non-price competition.

Answers

1. Any two: few large firms, high entry barriers, interdependence, product differentiation, possible collusion.
2. Rivals do not follow a price rise, so customers switch away.
3. Low pays 21 against High and 9 against Low, more than High’s 15 and 4.
4. (120 + 90 + 80 + 60) ÷ 500 = 350 ÷ 500 = 70%.
5. Each member gains by secretly cheating on the quota, as in the 416 against 324 example.
6. It stays the same, because MC still cuts the gap in MR.
7. For example: it ignores foreign competition, or depends on the market definition.
8. P = MC = £24, so Q = 72.
9. An outcome where neither player can gain by changing its own choice, given the other’s.
10. Advantage: builds loyalty and less elastic demand. Disadvantage: costs can exceed the extra sales, and rivals can match it.

Where marks are usually lost

• Writing “market share” without saying whether it is by sales, output or employment.
• Reading a concentration ratio as a number of firms.
• Labelling the elasticities the wrong way round at the kink.
• Giving a Nash equilibrium without checking best replies for both players.
• Asserting that collusion always raises profit, with no mention of cheating.
• Drawing a diagram with unlabelled axes or curves, or no marked equilibrium.
• Comparing market structures feature by feature without a view on efficiency.
• Ending an evaluation question with no conclusion or no example.

Official syllabus

Source: OCR A Level in Economics (H460), specification Version 3.0 (June 2026), for first assessment in 2021, published by OCR. Area of study: Competition and market power.