Economics Online Tutor
In economic theory, the oligopoly market structure basically covers cases
that do not fit well with the perfect competition, monopolistic competition,
or monopoly models.
Oligopoly covers many different types of situations, and economists have
not developed one model that adequately explains behavior for all
businesses in oligopoly. However, the oligopoly market structure itself
covers more real world situations than the models for the other market
The characteristics that distinguish oligopoly from other market structures are:
Few firms, some if not all are relatively large compared to the overall market size; and difficult, but not
impossible, entry into the market. The products may be differentiated or identical.
Firms have a large degree of control over the prices of their products, but the firms are highly
interdependent. Since each firm has a large market share, the actions of each firm are dependent on
the actions of competitors. If a firm does not react properly to a competitor's actions, it could lose
market share, and profits.
The behavior of firms in oligopoly can be described as either competitive or cooperative.
Competitive behavior includes much more than just price competition. Most real world innovation and
technological advances come from firms in oligopoly. Firms are continually trying to stay ahead of their
competitors with improvements that consumers will want. Firms in oligopoly often spend large sums of
money on research & development.
A large advertising budget is also typical.
There is no single economic model that explains all behavior in oligopoly. Two models that are used to
explain competitive behavior are the kinked demand curve and prisoner's dilemma. Some behavior by
firms in oligopoly can be described as cooperative rather than competitive.
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