A market structure where a few large firms dominate the industry. Products may be identical or differentiated. There are usually significant barriers to entry. Firms have substantial market power.
Collusion
Occurs when firms in an oligopoly cooperate to influence prices or production.
Price Fixing
An agreement among firms to sell at the same or similar prices.
Cartel
An association of producers formed to coordinate prices and production.
Price War
Where firms in an oligopoly compete by reducing prices.
Predatory Pricing
Occurs when a firm sets its price below cost for a short period to drive competitors out of the market.
After competitors leave, the firm may increase its price.
Competition Policy
A government action that prevents firms from gaining excessive market power and protects competition.
Anti-Trust Laws
Designed to encourage competition and limit monopoly or oligopoly power.
Four forms include:
- Regulating business practices
Government can intervene when a firm has excessive market power. - Breaking up monopolies
Monopolies may be broken up to increase competition. - Blocking mergers
A merger may be blocked if it significantly reduces competition. - Preserving incentives
Mergers may be allowed when they provide benefits to consumers.
Deregulation
Removal of some government controls over a market. Intended to promote competition.
Possible effects include:
- More competition
- Lower prices
- Greater variety
- Possible short-term job losses or business closures
Worked Examples
Identifying an Oligopoly
In the smartphone industry, firm ABC holds 35% of the market and firm XYZ holds 25%. R&D costs are heavy. Identify the market structure.
Solution Reveal Hide
The market is an oligopoly.
- 2 firms hold 60% of the market
- Barriers to entry are high
- Rivals’ decisions are interdependent
