by Electra Radioti

An oligopoly is a market structure characterized by a small number of firms that have significant market power. These firms are large enough to influence the market price and output but are interdependent, meaning the actions of one firm can directly affect the others. Key features of an oligopoly include:

  1. Few Dominant Firms: Typically, an oligopoly consists of two to ten firms controlling the majority of the market share.
  2. Barriers to Entry: High barriers to entry, such as significant capital requirements, patents, and economies of scale, prevent new competitors from easily entering the market.
  3. Interdependence: Firms in an oligopoly are interdependent; they must consider the potential reactions of their rivals when making decisions about prices, output, and other strategic factors.
  4. Non-Price Competition: Firms often engage in non-price competition, such as advertising, product differentiation, and improved customer service, to maintain or increase their market share.
  5. Price Rigidity: Prices in oligopolistic markets tend to be stable because firms are wary of price wars, which can erode profits for all players in the market.

Examples of Oligopolies:

  • Automobile Industry: A few large companies like Toyota, Ford, and General Motors dominate the global market.
  • Telecommunications: In many countries, a few firms like AT&T, Verizon, and T-Mobile control the market.
  • Airlines: Major carriers like Delta, American Airlines, and United Airlines dominate the industry.

Models of Oligopoly:

  1. Cournot Model: Assumes that firms compete on the quantity of output produced, with each firm deciding its production level based on the expected output of its competitors.
  2. Bertrand Model: Assumes that firms compete on price, leading to a situation where firms may continuously undercut each other, driving prices down to marginal cost.
  3. Kinked Demand Curve Model: Suggests that firms will not raise prices because rivals will not follow, but they will not lower prices either because rivals will match the price decrease, leading to a kinked demand curve and price stability.
  4. Stackelberg Model: One firm acts as a leader, setting its output first, while the other firms (followers) set their output levels based on the leader’s decision.
Kinked Demand Curve Model

Kinked Demand Curve Model

Collusion in Oligopoly:

  • Firms in an oligopoly may collude, explicitly or tacitly, to set prices or output levels to maximize collective profits. This behavior is often illegal and regulated by antitrust laws to promote competition and protect consumers.

Oligopolies are common in modern economies, and their unique characteristics create complex interactions among firms. Understanding oligopoly dynamics is crucial for analyzing market behavior, strategic decision-making, and regulatory policies.

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