Oligopoly is a market structure characterised by a small number of firms that dominate the industry and have significant control over pricing. Oligopolies are formed when there is a high barrier to entry for new firms, such as high start-up costs or government regulations. This allows the existing firms to maintain their market share and keep out potential competitors.
In an oligopoly, each firm has some degree of market power, which can influence the price of goods and services. This can be done through collusion between firms, where they agree to set prices at certain levels or restrict output to maintain higher prices. Alternatively, firms may compete with each other by offering different products or services to gain an edge over their rivals.
The main difference between an oligopoly and other market structures is that in an oligopoly, decisions made by one firm will affect the decisions of all other firms in the industry. So, for example, if one firm lowers its prices, all other firms must match those prices or risk losing customers to their competitors. This interdependence among firms creates a dynamic environment where strategic decisions must be made carefully to maximise profits and minimise losses.
Oligopolies are often associated with industries such as telecommunications, banking, oil & gas production, pharmaceuticals, and airlines due to their high barriers to entry and the significant capital investments required for success. However, any industry with few dominant players can be considered an oligopoly.