A non-collusive oligopoly exists when a small number of firms operate in a market and compete independently. There are no formal or informal agreements between them, so each firm makes its own decisions while trying to predict how its rivals will react.
Key characteristics:
- Firms do not form cartels or secret agreements.
- Each firm chooses its own prices and output levels independently.
- There is high interdependence, meaning a firm’s success depends on how competitors respond to its actions.
- There is constant uncertainty regarding the moves of rival companies.
Ways firms compete:
- Price competition: Firms may change prices, but this risks starting a price war.
- Non-price competition: Firms focus on advertising, product quality, branding, and innovation to win customers.
The Kinked Demand Curve model:
- This model explains why prices often stay stable.
- If one firm lowers its price, others may follow, leading to lower profits for everyone.
- If a firm raises its price, its rivals may not follow, causing that firm to lose customers to them.
- This tension creates a price kink, where firms prefer to keep prices steady.
Outcomes:
This market structure can lead to active competition with better prices for consumers, but the overall economic efficiency is often uncertain and generally lower than that of a perfectly competitive market.