What are the characteristics of oligopoly?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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There are a number of characteristics of a market that is in oligopoly.

First, the market has a relatively low number of firms.  Economists typically say that an oligopoly could include as many as 20 firms, but most oligopolies have fewer.  Of course, the minimum number of firms is 2 because if there were only one firm it would be a monopoly.

Second, oligopolies can produce identical products like firms in perfect competition do or they can produce differentiated products like firms in monopolistic competition do.

Third, there are extremely high barriers to entry in an oligopoly.  This can happen because of huge start-up costs or the importance of brand familiarity, or for other reasons.

Fourth, firms in an oligopoly are interdependent.  The actions of one firm will have a strong impact on the actions of the other firms because each firm has so much of the market share.  Firms will try to respond to the other firms’ actions so as to maintain their own competitiveness.

Fifth, firms will tend to compete with one another on things other than price.  Firms in oligopoly will typically match price decreases, but not price increases.  Therefore, dropping prices does not help any of the firms and they try to avoid it.

Finally, firms in oligopolies have a strong incentive to collude with one another.  It is beneficial to all if they cooperate and fix their prices so that all the firms can make higher profits.  This is illegal in the US, but firms still have an incentive to attempt to do this secretly.

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