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An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.

Oligopoly is distinguished from perfect competition because each firm in an oligopoly has to take into account their interdependence; from monopolistic competition because firms have some control over price; and from monopoly because a monopolist has no rivals. In general, the analysis of oligopoly is concerned with the effects of mutual interdependence among firms in pricing and output decisions.

There are several types of oligopoly. When all firms are of (roughly) equal size, the oligopoly is said to be symmetric. When this is not the case, the oligopoly is asymmetric. One typical asymmetric oligopoly is the dominant firm. An oligopoly industry may produce goods which are homogeneous/ undifferentiated or it may produce goods which are heterogeneous/ differentiated. The analysis of oligopoly behaviour normally assumes a symmetric oligopoly, often a duopoly. Whether the oligopoly is differentiated or undifferentiated, the critical problem is to determine the way in which the firms act in the face of their realized interdependence.

In general, there are two broad approaches to this problem. The first is to assume that firms behave cooperatively. That is, they collude in order to maximize joint monopoly profits. The second is to assume that firms behave independently or non-cooperatively. The analysis of oligopoly behaviour under the non-cooperative assumption forms the basis of oligopoly theory.

Within non-cooperative oligopoly theory a distinction is made between models in which firms choose quantities and those in which they choose prices. Quantity-setting models are often referred to as Cournet models and price-setting models as Bertrand models.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Perfect competition


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Monday, March 10, 2003