An oligopoly is a market structure characterized by large firms that dominate the market, offering similar or identical products. This concentration of market power with few competitors creates a unique set of dynamics and strategic interactions.
One of the defining features of an oligopoly is the interdependence among firms. Decisions made by one firm regarding prices, output, and advertising affect the market share and profits of all other firms in the industry. This mutual dependence often leads to strategic behavior, which can result in either competition or cooperation. Firms may engage in tacit collusion to avoid price wars, or they might form explicit cartels to maximize collective profits, although the latter is often illegal.
Another hallmark of oligopoly is barriers to entry, which are significant and prevent new competitors from easily entering the market. These barriers can be economic (high startup costs), legal (patents and licenses), or strategic (control of scarce resources). These barriers allow oligopolistic firms to maintain supernormal profits in the long run, unlike in perfect competition or monopolistic competition.
Oligopolies often engage in non-price competition, differentiating their products through branding, quality, and extensive advertising campaigns to gain greater market share without triggering price-based competition.
Price rigidity is another feature, where prices tend to be sticky, especially downwards, due to the fear of retaliatory price cuts by competitors. Instead, firms often compete on technology, product quality, and customer service. This can lead to inefficiencies as prices remain above marginal cost.
