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Oligopoly is a market structure in which a few firms dominate a specific market. This structure creates a high degree of interdependence among them, meaning that minor changes to the decisions of one firm have an immediate effect on those of its competitors. This means that the firms must carefully consider the effect of major decisions on the market and use aggressive or defensive marketing strategies in order to maintain a competitive edge. The high level of interdependence between firms also leads to higher prices for consumers and discourages innovation.
Another characteristic of oligopoly is the existence of collusion among companies. This type of collusion prevents new players from entering the market and makes companies operate as one. For example, one firm can set a price higher than another, preventing competitors from reacting to that price. Because the prices of goods are more fixed in oligopolistic markets, new entrants are discouraged from entering them.
In addition to the limited number of players in oligopolies, firms in oligopolies are often more sensitive to advertising costs, and they must avoid price cutting because it could lead to a price war, driving some firms out of the market. In addition to these features, oligopolists must avoid profit-maximizing behavior and individual interests, and they must have a leader to guide their actions.
Oligopoly also produces a kinked demand curve. This kinked demand curve results in price rigidity in oligopoly markets. Moreover, the prevailing price, OP0, corresponds to the OP1 price. As a result, price cuts by rivals will not affect the elasticity of demand.
Oligopolies are common in many industries, such as oil, telecommunications, and airline industries. They often require significant initial capital investments, which discourage new competitors. They also often have a high level of intellectual property protections, which favor incumbents and protect the interests of a select few. Oligopolies are not always a bad thing, but they do make competition in these markets more difficult and create significant barriers to entry.
Another example of oligopoly is in the automobile industry. In the United States, two automakers dominate the market. Other examples include Nissan, Toyota, and Honda. Oligopoly also occurs in supermarkets and other industries. Further, oligopolies have the potential to create price wars when one firm raises its prices. This results in high prices for consumers.
Oligopolies often lead to trapped companies that cannot break away. In such cases, they may face heavy social consequences. Some oligopolies even allow for the punishment of cheaters. This can drive a business out of the market. However, in the long run, this is not a good thing.
Another important characteristic of oligopoly is price rigidity. Firms that cannot adopt independent strategies will be reluctant to change prices. Therefore, a price increase by a single firm may lead to a price war, in which one firm's price is equal to all of its rivals' marginal costs.
So, Oligopoly is a market structure in which a few firms dominate a specific market. This structure creates a high degree of interdependence among them, meaning that minor changes to the decisions of one firm have an immediate effect on those of its competitors.
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