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In economics, an oligopoly is a market structure where only a few market participants compete with each other. The competitive dynamics within an oligopoly are distorted to favor a limited number of influential sellers.
Oligopolies can be characterized by collusion, where firms act jointly like a monopolist to share industry profits, or by competition, where firms compete aggressively for individual profits. Oligopolies are a form of imperfect competition that occurs when there are two to ten sellers in a market selling homogeneous or differentiated products.
There are three models of oligopoly markets: Cournot model: Firms choose quantities. In this model, firms face downward-sloping demand curves, which means that the price they receive for their output depends on the total quantity produced. Bertrand model: Firms choose prices. Stackelberg: In this model, one firm sets its output before the other firms do. It is also called quantity leadership model.
Oligopolies can either be collusive or non-collusive: Collusive oligopoly: Firms form an agreement to jointly set prices and choose the production level at which they can maximize their profits. Non-collusive oligopoly: Firms compete with each other rather than cooperating.
Related Tests:
Economics 101 Practice Test: Competitive Markets
Economics 101 Practice Test: Monopoly
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