An oligopoly is a market structure where there are a few large firms which dominate the market. Unlike for a monopoly there is not a specific percentage of the market which firms must hold in order to be called an oligopoly.
In a typical oligopoly market structure there will be three to six large firms dominating the sale of a particular good or service.
Oligopolies tend to exist due to the high barriers to entry. These are obstacles which make it difficult for new firms to join a market such as high-start up costs and the need for specialist equipment and technology.
Oligopoly markets tend to be quite stable as the large firms try to avoid competing on price in order to avoid starting a price war. Instead oligopolies try to find other ways to compete such as through impressive advertising campaigns, special promotions, and diversifying their products in attractive ways that appeal to consumers.
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Key terms:
Price war – a situation where firms aggressively compete on price to try and push each other out of the market.
Collusion – where firms cooperate illegally and make agreements like fixing the price and limiting production in order to benefit them both.