An oligopoly is a market structure dominated by a small number of large companies. These firms hold significant market power, meaning their business decisions are closely connected to one another.

Key features of an oligopoly:

• High Market Concentration: A few dominant firms control the majority of the market share.
• Interdependence: The actions of one firm, such as changing prices, directly impact the success of its competitors.
• Uncertainty: Companies must constantly predict how their rivals will react to their strategies.
• Non-price Competition: Instead of just lowering prices, firms compete through marketing, product quality, and brand loyalty.
• Collusion Potential: Firms may choose to cooperate to set prices (like a cartel) or compete aggressively.

The Kinked Demand Curve Model:

• If one firm lowers its price, others usually follow, making demand elastic.
• If one firm raises its price, others often choose not to follow, making demand inelastic.
• This dynamic often leads to price rigidity, where prices remain stable at a specific point.

Types of Oligopoly:

• Collusive Oligopoly: Firms cooperate to control the market, often forming a cartel.
• Non-collusive Oligopoly: Firms compete independently against each other.