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Oligopolistic Market
An oligopoly exists when a few companies dominate an industry. This concentration often leads to collusion among manufacturers, so that prices are set by agreement rather than by the operation of the supply and demand mechanism.
For an oligopoly to exist, the few companies do not need to control all the production or sale of a particular commodity or service. They only need to control a significant share of the total production or sales.
As in a monopoly, an oligopoly can persist only if there are significant barriers to entry to new competitors. Obviously, the presence of relatively few firms in an industry does not negate the existence of competition. The existing few firms may still act independently even while they collude on prices.
In an oligopolistic market, competition often takes the form of increased spending on marketing and advertising to win brand loyalty rather than on reducing prices or increasing the quality of products.
Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets - which economists seek to model through the use of game theory.
Economics is much like a game in which the players anticipate one another's moves.
Game theory may be applied in situations in which decision makers must take into account the reasoning of other decision makers. It has been used, for example, to determine the formation of political coalitions or business conglomerates, the optimum price at which to sell products or services, the best ...