What is the importance of interdependence in an oligopolistic market?

Interdependence is crucial in an oligopoly, a system in which a few firms control the market for their product or service. These firms must work together to maintain prices and supplies and to balance the market share if the oligopoly is to continue.

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In an oligopoly, a few firms control the market in their particular area and work together to control both prices and supply to make sure that they all earn a profit. To do this, firms have to work together and not cheat. They have to be interdependent upon one another.

Firms in an oligopoly must agree to maintain a stable price point for their products or services to ensure that they all attain a share of the market. If one company under-prices the others, that is considered cheating. If another company floods the market with increased levels of product, this, too, is cheating. These companies shift the balance away from the oligopoly and throw off the distribution of the market, seeking more for themselves. Therefore, if an oligopoly is to be kept in place, all companies involved have to be true to their agreements and remain satisfied with their own share of the market.

Let's look at an example. Three companies that provide cell phone service agree to form an oligopoly. They agree to a set of prices that will apply across all three companies, as well as a set number of products and innovations that they will release and when they will release them. If all three companies remain committed to their agreement, they should split the market mostly evenly. If, however, one company gets greedy and decides it is fed up with the balance, it may cheat by dropping its prices or introducing a new product sooner than agreed. In that case, the interdependence of the oligopoly is broken, and greater competition arises.

Oligopolies are, at the very least, discouraged by the government because they limit opportunities for new companies, increase prices for consumers, and interfere with innovation. Yet controlling oligopolies is quite difficult, if not practically impossible.

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