Cambridge International as and a level Economics Ebook

168
Cambridge International A Level Economics

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war. An oligopolist would only start a price war if its costs of 
production were signifi cantly lower than those of its rivals. 
A price war may be the natural outcome of events, such as 
overcapacity in the industry or the entry of new fi rms. It 
could also be a defensive tactic where an oligopoly is losing 
market share to its rivals. A very good example of this is 
in the supermarket business in the UK where the market 
leaders, Tesco especially, are being increasingly challenged by 
non-UK discounters such as Aldi and Lidl. Where the fi rms 
are highly diversifi ed, a fi rm may be prepared to sacrifi ce 
profi ts by cutting the price, in an attempt to increase or even 
retain market share. Profi ts from some of its activities may 
be used to cover short-term losses elsewhere in the business.
Although they each have market power in the form 
of infl uence over the prices they charge, the uncertainty 
surrounding the outcome of competitive tactics means that 
fi rms may prefer non-price competition. Th
e observation is 
that prices tend to be similar between oligopolists and are 
stable over time
.
Th
e fi rm will therefore be better off concentrating 
on non-price competition to increase revenue. Th
is may 
include the following:
■ 
advertising and promotions
■ 
product innovation – the attempt to make the products 
more appealing to consumers
■ 
brand proliferation – where the firm produces lots of brands 
to saturate the market and to leave no gaps for rivals
■ 
market segmentation – producers may decide that there are 
markets where the consumers have diff erent characteristics 
and needs, and these market niches will be catered for 
through product innovation
■ 
process innovation – usually seen as a way of reducing 
average costs, allowing the firm to cut the price without 
sacrificing profits.
One way for a fi rm to grow rapidly would be to take over one 
of its rivals. Th
is so-called