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Oligopoly: price and non-price competition
Edexcel IAL Economics · WEC13 Business behaviour
Oligopolists can compete on price, or compete in other ways. Each choice has different costs and benefits for firms and consumers.
Price competition
- Price war: firms repeatedly undercut each other. Profits fall, weaker firms may leave; consumers gain in the short run.
- Predatory pricing: an established firm sets price below average variable cost to drive a rival out of the market, intending to raise price later. It is illegal in many countries but hard to prove.
- Limit pricing: price is set at the highest level that still deters entry (just below the entrant's average cost). Price stays above the competitive level but below the short-run profit-maximising level.
Non-price competition
Because price cuts are quickly matched (and risk a price war), oligopolists often compete in other ways:
- Advertising and branding
- Quality improvements and new features
- Endorsements by well-known figures
- Product placement in films and media
- After-sales service: warranties, repairs, customer support
- Loyalty schemes, store layout, opening hours, delivery.
Costs and benefits
| Price competition | Non-price competition | |
|---|---|---|
| Consumers | Lower prices now; but predatory pricing may lead to higher prices and less choice later | Better quality, service and information; but advertising costs may raise prices, and some advertising is persuasive rather than informative |
| Firms | Can gain market share; but lower profits and a risk of price wars | Builds loyalty and makes demand less elastic; but costly and sunk, and success is uncertain |
| Competition | Predatory pricing reduces competition over time | Heavy advertising raises barriers to entry |
Evaluation
Whether competition benefits consumers depends on how many firms there are, whether price cuts are sustainable or predatory, how contestable the market is, and how strong competition authorities are.
Worked example
A dominant airline cuts fares on one route below its average variable cost just after a new low-cost rival starts flying it. Explain what this is and why it harms consumers in the long run.
- Price below AVC is loss-making on purpose, aimed at a rival: predatory pricing.
- If the rival leaves, the dominant firm regains market power.
- It can then raise fares above the original level, with less choice for passengers.
Answer: Predatory pricing: cheap now, but higher prices and less choice once the rival exits.
Check yourself
- Predatory pricing involves
- setting price just low enough to deter entry
- charging different prices to different consumers
- matching the price leader
- setting price below average variable cost to force a rival out
Show answer
setting price below average variable cost to force a rival out. The aim is to remove an existing rival, then raise price.
- Which is an example of non-price competition?
- Cutting price by 10%
- Offering a five-year warranty
- Joining a cartel
- Charging lower prices at off-peak times
Show answer
Offering a five-year warranty. After-sales service competes without changing the price.
- Why do oligopolists often prefer non-price competition?
- Non-price competition is always cheaper
- Price competition is illegal
- Demand is perfectly elastic
- Price cuts are quickly matched by rivals and can start a price war
Show answer
Price cuts are quickly matched by rivals and can start a price war. Interdependence means a price cut rarely gains share for long.
- A smartphone brand pays for its phone to be used by characters in a popular film. This is
- product placement
- endorsement
- predatory pricing
- limit pricing
Show answer
product placement. The product appears within media content.
- In the short run, a price war is most likely to benefit
- the firms, through higher profits
- shareholders, through higher dividends
- consumers, through lower prices
- new entrants, through higher prices
Show answer
consumers, through lower prices. Prices fall while firms' profits are squeezed.
- Explain one cost to consumers of heavy advertising in an oligopoly.
Show answer
Advertising is a cost to firms that may be passed on in higher prices, and it builds brand loyalty that raises barriers to entry, so there is less competition and choice.. Link advertising spending to prices or to reduced competition.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.