Oligopolies
real world imperfect competition.
Definition:
Oligopoly is a market structure which involves a few large, concentrated firms*. Barriers to entry are high, products are differentiated. However, the most important feature of oligopoly is the firm's behaviour. Oligopoly is best defined by market conduct rather than market structure.
*Concentrated firms are firms with a high concentration ratio. They have a high market share.
What makes oligopoly different to perfect competition and monopoly?
Oligopoly is usually closer to monopoly than it is perfect competition, in terms of its market outcome. This is because firms usually have a high concentration ratio which means their market share is relatively high. This gives them price making ability so they don't have to follow the market price to survive all the time.
The other major difference of oligopoly is the behaviour and strategy of firms within the market. Monopolies and perfectly competitive markets have one simple strategy: profit maximsiation. An oligopoly firm doesn't have that luxury. Because there are other big firms in the market, an oligopoly firm must employ the best strategy to survive. Some strategies may involve profit maximsiation, but others may involve revenue maximisation, cost minimisation, sales maximisation, more spending on advertising etc.
In an oligopoly market there is a high degree of interdependence. This means that the decisions of firms are influenced by the potential decisions of other firms. A firm decides what to do so it can best compete with its competitors. In economics, this idea has been named game theory because the firms are said to be competiting in a strategic game.
Please read the next articles about game theory for more details on this topic.
What have we learned?
Definition of oligopoly
Market structure vs market conduct in oligopoly markets
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