How does oligopoly compare with other market structures?
| Market | Number of firms | Pricing power | Example |
|---|---|---|---|
| Perfect competition | Very many | None | Wheat |
| Monopolistic competition | Many | Some | Restaurants |
| Oligopoly | Few | Significant | Wireless carriers, airlines |
| Monopoly | One | High | Local water utility |
The defining feature is interdependence: before cutting prices, a firm must predict whether rivals will match, which tends to make prices sticky. Oligopolies are common where economies of scale are large.
Why do oligopolies collude?
Everyone profits if prices stay high, but each firm is tempted to undercut and steal customers—a prisoner's dilemma analyzed with Nash equilibrium (Tirole, 1988). So firms may try to fix prices or split markets in a cartel, which US antitrust law (the Sherman Act) prohibits. Leniency programs that reward the first firm to confess help break cartels.
FAQ
- Are oligopolies always bad?
- They can fund big investments and R&D, but regulators watch for anti-competitive behavior.
- Is OPEC an oligopoly?
- It's a classic international cartel coordinating oil output.
Sources reviewed: 2026-10-25
References
- Tirole, J. (1988). The theory of industrial organization. MIT Press.
- Nash, J. (1950). Equilibrium points in n-person games. PNAS, 36(1), 48–49.