Oligopoly

An oligopoly is a market structure characterized by a small number of large producers who together hold a large share of market output. Because there are only a few firms, each firm’s actions affect the others, creating strategic interdependence. Markets can feature either homogeneous products or differentiated products.

Barriers to entry are typically high, including capital requirements, control of key inputs, and economies of scale, which maintain the firms' market power. Non-price competition such as advertising and product differentiation is common.

Oligopolies are analyzed with game theory. Common models include the Cournot model (firms compete on quantity), the Bertrand model (firms compete on price), and the Stackelberg model (one firm leads). A kinked-demand theory has explained price rigidity in some industries. Firms may also engage in strategic behavior such as price leadership or collusion.

Outcomes vary; prices tend to be above competitive levels, and profits may be sustained by mutual interdependence. Collusion can raise prices further but is often unstable; legal prohibitions and enforcement apply. Oligopolies can also foster innovation and dynamic efficiency through competition on non-price factors.

Measurement of market concentration uses indicators such as concentration ratios (for example CR4) and the Herfindahl-Hirschman Index. Examples include the automotive, airline, telecommunications, and energy industries, and international cartels such as OPEC.