Oligopoly

PrepNuggets

The most important characteristic of an oligopoly market is that there are only a few firms competing. Barriers to entry are high, often because economies of scale in production or marketing lead to very large firms. While products are typically good substitutes for each other, they may be either quite similar or differentiated through features, branding, marketing, and quality. 

One unique characteristic of an oligopoly is that each firm must consider the strategies and actions of other firms, in setting its own price and differentiation strategy. We say that such firms are interdependent. Demand is also downward sloping, but can vary in elasticity. In general, firms that have very differentiated products tend to have more elastic demand than firms with less differentiation.

The telco industry is a good example of an oligopoly with less differentiated firms.  The basic services that they provide are quite similar, so they have limited pricing power.

On the other hand, the automobile market is an oligopoly that the firms differentiate themselves on features, quality, branding, and marketing.  Such car makers have significant pricing power, resulting in more inelastic demand, and greater variance in car prices.

See also: Perfect Competition, Monopolistic Competition, Monopoly

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