Oligopoly

Definition and Characteristics

An oligopoly is a market structure characterized by a small number of firms whose decisions are interdependent. This means that each firm's actions regarding output, pricing, and strategy can significantly affect the other firms in the market.

• Few Firms: Oligopolies consist of a small number of large firms.

• Interdependence: Firms must consider the potential reactions of rivals when making decisions.

• Barriers to Entry: High barriers often prevent new competitors from entering the market.

• Market Power: Firms may have significant control over price and output.

Example: The electronic payment processing market is dominated by Visa and MasterCard, making it a duopoly (a special case of oligopoly with two firms).

Duopoly

A duopoly is a specific type of oligopoly where only two firms dominate the market. Their strategic decisions are highly interdependent.

• Example: Visa and MasterCard in electronic payment processing.

• Contrast: Markets with three or more major firms (e.g., Boeing, Airbus, and Bombardier in aircraft manufacturing) are oligopolies but not duopolies.

Cartels

A cartel is a group of firms that collude to control output and prices, aiming to increase their economic profit. Cartels are illegal in many countries due to their negative impact on competition and consumers.

• Purpose: To limit output and raise prices, thereby increasing economic profit for member firms.

• Key Actions: Members agree on production quotas and pricing strategies.

Example: OPEC is a well-known cartel in the oil industry.

Key Terms and Concepts

• Interdependence: The outcome for each firm depends on the actions of other firms.

• Market Share: The proportion of total sales in the market controlled by a firm.

• Economic Profit: Profit above and beyond normal profit, often achieved through market power or collusion.

Relevant Equations

• Total Revenue:

• Economic Profit:

Comparison Table: Market Structures

Additional info: The notes above expand on the brief quiz questions by providing definitions, examples, and a comparison table for market structures relevant to oligopoly and duopoly.