A market in which there are a few large firms competing with one another. It is characterised by:
• differentiated products , sometimes with well-known and easily distinguished brand names
• barriers to entry , such that it may be difficult or impossible for new entrants to come into the market
• the fact that firms may make supernormal profits in the long run, because of the barriers to entry
• the relatively small number of competing firms, which is likely to include price makers and price takers . The former will tend to set prices and the latter will tend to follow.
Oligopolies can have very stable prices, because firms will often favour non-price competition . They may seek to expand their market share on the strength of design or advertising. There may be tacit collusion , with no price cuts but intense efforts to promote products in other ways.
Occasionally, though, a price war may break out, in which one firm begins aggressive price-cutting strategies and others follow, each trying to undercut the other in a bid for increased market share. This is good for consumers in the short run but may lead to the least profitable firm going out of business. Then competition is reduced and a return to tacit collusion is likely. Petrol provides occasional examples of price wars.
Interdependent behaviour is an important feature of oligopoly, because the small number of competing firms watch each other closely, devising strategies which take into account the likely reaction of the others.
Some oligopolies have a number of large competitors, as with Coca-Cola and other major soft drink suppliers, together with a large number of comparatively small suppliers which are price takers.