Answer: Oligopoly is a market structure characterized by a small number of firms that dominate the market.
Explanation: In an oligopoly, the actions of one firm can significantly impact the others, leading to strategic decision-making and interdependence among firms. Here are some key characteristics of oligopoly:
- Few Dominant Firms: A small number of large firms hold a significant market share, which means each firm’s actions can affect the market.
- Interdependence: Firms are interdependent; the decision of one firm influences the decisions of others. This often leads to strategic planning and competitive behavior.
- Barriers to Entry: High barriers to entry prevent new firms from entering the market easily. These barriers can be due to high startup costs, economies of scale, or strong brand loyalty.
- Product Differentiation: Products may be homogeneous (similar) or differentiated (unique features). Firms often compete on factors other than price, such as quality, branding, and advertising.
- Price Rigidity: Prices tend to be stable because firms are wary of price wars, which can be detrimental to all players. Instead, they may compete through non-price competition.
- Collusion Potential: There is a potential for collusion, where firms may agree to set prices or output levels to maximize collective profits, although this is illegal in many jurisdictions.
These characteristics lead to a complex market environment where firms must consider the potential reactions of their competitors when making decisions.