What is an oligopoly?

Oligopoly is an economic market structure wherein a small number of firms dominate the industry and account for the majority of the market share. It occurs when few firms have some degree of control over supply and prices, and there are significant barriers to entry for other firms trying to enter the industry.

Features of Oligopoly Market

Some key features of oligopoly include:

  • The most important feature of oligopoly markets is there are only a few firms in the market, and each has a significant share of the market. This means that each firm's actions can have a significant impact on the market and the other firms.
  • A second key feature of oligopolies is that the firms in an oligopoly market are highly interdependent, meaning that their decisions and actions affect each other. For example, if one firm raises its prices, the other firms may respond by also raising their prices or by offering discounts to compete.
  • Thirdly, oligopoly markets often have barriers to entry, such as high startup costs or government regulations, which make it difficult for new firms to enter the market and compete with the existing firms.
  • Another key feature is that one firm in an oligopoly market may serve as a "price leader," setting the prices for the other firms to follow. The other firms may follow the price leader's prices, or they may choose to set their prices and compete with the leader.
  • Last but not least is non-price competition. Because firms in an oligopoly market often have similar products and face little competition, they may compete with each other using non-price factors such as advertising and product quality.

Oligopoly vs Monopoly

Monopolies and oligopolies are two economic arrangements that have a lot in common, but also have some distinctive differences. Monopolies are defined as when a single company or individual holds complete control over an entire market. Oligopolies, on the other hand, occur when a small number of firms dominate the market to keep competition low and prices high. Also, in an oligopoly, there is limited room for potential competition. The key difference between these two models is that while monopolies limit consumer options to one provider, oligopolies allow customers to choose between a few firms in the same industry.

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