Oligopoly

Oligopoly describes a market dominated by a small number of large sellers, few enough that each firm's own price and output decisions visibly affect its rivals' sales, and each firm knows this and takes its rivals' likely reaction into account before acting. This mutual awareness — called interdependence — is the single feature that most sharply separates oligopoly from every other market form in this chapter: a perfectly competitive or monopolistically competitive firm is too small relative to the whole market to worry about any one rival's reaction, and a monopolist has no rival to react to at all, but an oligopolist must constantly ask, "if I cut my price, will my rivals cut theirs too?"

The product sold under oligopoly may be homogeneous (pure oligopoly — cement and steel are commonly cited examples, since one firm's cement is much like another's) or differentiated (differentiated oligopoly — the automobile or smartphone industry, where a handful of large manufacturers each sell a recognisably branded, non-identical product). Entry is generally difficult, restricted by large capital requirements, economies of scale, or the sheer complexity of matching an established rival's technology and distribution network, so the small number of sellers tends to persist over time rather than being eroded by new entrants. …