An oligopoly is a market structure in which there are a small number of firms that dominate the market and sell a similar or homogeneous product or service. In an oligopoly, firms have a degree of market power and are interdependent, meaning that their actions and decisions have an impact on their competitors and the overall market.
There are several characteristics that define an oligopoly:
- Few sellers: An oligopoly is characterized by a small number of firms that dominate the market. This means that there is less competition among firms compared to a monopolistically competitive or perfectly competitive market.
- Similar or homogeneous products: Firms in an oligopoly often sell similar or homogeneous products or services, which means that they are close substitutes for one another. This makes it easier for customers to switch between firms if they are unhappy with the price or quality of a particular firm’s product or service.
- Interdependence: Firms in an oligopoly are interdependent, meaning that their actions and decisions have an impact on their competitors and the overall market. For example, if one firm raises its price, its competitors may decide to follow suit or lower their own prices in order to remain competitive.
- Some degree of market power: Because there are only a few firms in an oligopoly, each firm has a degree of market power and can influence the price and quantity of the good or service it sells. However, this market power is not as strong as in a monopoly.
Examples of oligopolies include markets for automobiles, telecommunications, and airline services.