What is an Oligopoly?
An oligopoly is a market structure dominated by a few large firms. Each firm’s actions influence its rivals — and vice versa.
Key Features:
- Few sellers
- High barriers to entry
- Interdependence in decision-making
- Strategic behavior
Examples: Airlines, smartphones, streaming services
Game Theory Basics
Game theory helps explain how firms behave in interdependent markets.
The Prisoner’s Dilemma
A classic example where two players choose between cooperation and self-interest. Applied to firms:
- If both keep prices high → mutual profit
- If one cheats and cuts price → gains market share
- If both undercut → both lose profits
Nash Equilibrium
A situation where no player can improve their outcome by unilaterally changing strategy. In oligopoly, firms reach a stable but not necessarily optimal outcome.
Price Rigidity & Kinked Demand Curve
- Firms may be reluctant to change prices
- If one lowers prices, others follow → elastic below kink
- If one raises prices, others don’t → inelastic above kink
Result: Prices tend to “stick” in oligopolistic markets
Types of Competition
- Cournot Model: Firms compete on quantity
- Bertrand Model: Firms compete on price
- Collusion: Firms cooperate (illegally) to maximize joint profit (e.g., cartels like OPEC)
Key Takeaways
- Oligopolies are strategic and complex
- Game theory models predict firm behavior
- Real-world pricing may be rigid due to fear of retaliation
