Oligopoly
An oligopoly is a market structure characterised by a small number of large firms, each of which is large enough to influence market conditions, and in which the behaviour of each firm depends on the behaviour of the others. Strategic interdependence is the defining feature of oligopoly.[1]
Definition
In an oligopoly, a few firms dominate the market. Entry may be possible but is often difficult, and the products may be homogeneous (as in steel or cement) or differentiated (as in automobiles or soft drinks). Because each firm's profit depends on the actions of its rivals, oligopolists engage in strategic behaviour, which is analysed using game theory.[1]
Characteristics
| Feature | Description |
|---|---|
| Number of firms | A few large firms. |
| Interdependence | Each firm's decisions affect and are affected by rivals. |
| Product type | May be homogeneous or differentiated. |
| Barriers to entry | Moderate to high. |
Models of oligopoly
Several models seek to explain oligopolistic behaviour:
- Cournot model — firms compete by choosing quantities simultaneously.
- Bertrand model — firms compete by choosing prices.
- Stackelberg model — firms move sequentially, with a leader and followers.
- Cartels and collusion — firms coordinate to restrict output and raise prices, as in a cartel.
Outcomes
Oligopolistic markets may produce outcomes ranging from intensely competitive to near-monopolistic, depending on the degree of collusion and the nature of competition. Because of the risk of collusion and the concentration of market power, oligopolies are a focus of competition policy.[1]