Oligopoly Competition

An oligopoly is a market structure characterized by few sellers holding a substantial market share, leading to restricted competition. For example, consider a hypothetical soft drink industry, with only three sellers.

This market exists because of high barriers to entry due to high investment costs, regulations, or control over resources.

Another feature is the interdependence of firms. The actions of one firm considerably impact the others. For example, in the soft drink industry, if one firm introduces a new product, such as a sugar-free beverage, it triggers the competitors to do the same.

Firms are often rigid in their prices; if one lowers its prices, others might do the same, leading to a price war. Conversely, if one raises prices, it risks losing customers to competitors.

So, they avoid competing on prices. They rather focus on factors like advertising, customer service, and product differentiation.

Oligopolies can increase prices, reduce innovation, and limit consumer choices. This happens because of the presence of limited competition.

When there are two sellers in an industry, that market structure is called a duopoly.