Under Oligopoly, there are a few large firms although the exact number of firms is undefined.

Also, there is severe competition since each firm produces a significant portion of the total
output.

It raises barriers for new entrants to enter into the respective sector. It thus limits the competition
to only those already in the group. The control of oligopolists over specialized inputs, such as
resources, price, and production, makes it difficult for a new firm to survive. Besides, high capital
requirements, licensing, patents, market demand, economies of scale, limit-pricing, and
customer loyalty restrict the entry of new businesses.

The oligopoly market has significant barriers to entry. It also requires a considerable investment
to enter and participate in the market. Therefore, relatively few firms can acquire the investment
to compete in the market.

Because of their large size and minimal competition, each firm in an oligopoly market structure
influences the others. It includes decisions made in concentrated markets, such as product
prices, quality standards, and production planning. It also means that each firm must be aware
of the reaction of others to their actions.

Firms try to avoid price competition due to the fear of price wars in. Instead, they try different
approaches, such as rewarding customers for their loyalty, differentiating their product offerings,
providing sales promotion schemes, acting as sponsors, etc.This ensures that firms can
influence demand and build brand recognition.

In an oligopoly, dominant market players are influential enough to decide on the price of
products and services. And rest of the businesses or minor players follow the same. It helps
avoid the potential price war and price rigidity. All firms stick to what has been decided, thereby
ensuring price stability in the sector.

Since firms try to avoid price competition and there is a huge interdependence among firms,
selling costs are highly important for competing against rival firms for a larger market share.
When firms don’t compete in terms of prices, they compete by differentiating their products.
Even though the products of companies A and B are similar, there must be something that
distinguishes them. And that is what turns out to be the unique selling proposition (USP) of the
respective brands in the oligopolistic industry.

Unlike other market structures, under Oligopoly, it is not possible to determine the demand
curve of a firm. This is because on one hand, there is a huge interdependence among rivals.
And on the other hand there is uncertainty regarding the reaction of the rivals. The rivals can
react in different ways when a firm changes its price and that makes the demand curve
indeterminate.

When oligopolistic firms consider what quantity to produce and what price to charge, they face a
temptation to work with the other firms to act as if they were a single monopoly. By acting
together, oligopolistic firms can hold down industry output, charge a higher price, and divide the
profit among themselves. When firms act together in this way to reduce output and keep prices
high, it is called collusion. A group of firms that have a formal agreement to collude to produce
the monopoly output and sell at the monopoly price is called a cartel.

Even when oligopolists recognize that they would benefit as a group by acting like a monopoly,
each individual oligopoly faces a private temptation to produce just a slightly higher quantity and
earn slightly higher profit—while still counting on the other oligopolists to hold down their
production and keep prices high. If at least some oligopolists give in to this temptation and start
producing more, then the market price will fall. A small handful of oligopoly firms may end up
competing so fiercely that they all find themselves earning zero economic profits—as if they
were perfect competitors. This situation is called cut-throat competition.

One of the characteristics of an Oligopoly is the high entry barriers. Barriers to entry are the
obstacles or hindrances that make it difficult for new companies to enter a given market. These
may include technology challenges, government regulations, patents, start-up costs, or
education and licensing requirements.

A combination of the barriers to entry that create monopolies and the product differentiation that
characterizes monopolistic competition can create the setting for an oligopoly. For example,
when a government grants a patent for an invention to one firm, it may create a monopoly.
When the government grants patents to, for example, three different pharmaceutical companies
that each have its own drug for reducing high blood pressure, those three firms may become an
oligopoly.

Therefore, Oligopoly is a market structure where a few interdependent firms compete, each firm
pays close attention to what the other firm does and this is possible because a relatively small
number of firms compete in the market. Barriers to entry result in less competition by preventing
the entry of new firms in the market.

Oligopolies are considered stable. One of the main reasons why they are is because
participating firms need to see the benefits of collaboration over the costs of economic
competition, then agree to not compete and instead agree on the benefits of cooperation.

In order for an oligopoly to arise and then remain in existence, firms in a

Once this recognition has taken place, these businesses will have to come to a shared
agreement to choose to cooperate. Then, they must conceal their price-fixing activities from the
general public. There are a number of ways to do this; for instance, they can mirror the actions
of an agreed-upon price leader, raising prices when the price leader does so.
The most significant threat to the existing balance of an oligopoly is the fact that each business
in such a structure is incentivized to sabotage the other businesses for their own financial
benefit. For instance, if all of the businesses have come to a shared agreement to maintain
artificially high prices and artificially low supply, one of them could decide to lower their own
prices or increase the amount of goods/services offered on the market, thereby making huge
profits. So why doesn’t this always happen?

In fact, this situation can be explained by framing it as a form of “prisoner’s dilemma.”

Have you ever wondered what happens when there are only a few firms in a market, and the
government steps in to regulate them?

Oligopoly regulation refers to government regulation to reduce the oligopoly power to ensure
appropriate level of competition in the market.

Ways the government can regulate monopolies and oligopolies is by antitrust law. To protect
consumers, the government creates regulations to prevent monopolies and oligopolies from
being anticompetitive or trying to prevent new firms from entering the market. Laws can prevent
behaviors like collusion, price-fixing, output restrictions, and so forth. And particularly in mixed
economies, governments may institute policies explicitly allowing oligopolies to exist, where they
are regulated/supervised by government agencies.

Since firms are interdependent, they have the choice of competing against other firms or
collaborating with them. By competing they may increase their own market share at the expense
of their competitors, but by collaborating, they decrease uncertainty and the firms together can
act as a monopoly.

Collaborating Oligopolies
● When two or more oligopolies agree to fix prices or take part in anti-competitive
behavior, they form a collusive oligopoly. This agreement can be formal or
informal.
● Collaborations are unlikely to last as firms have an incentive to cheat. They all
would like the other members to restrict their output to what everyone agreed but
would want to increase their production. However, if they are a few big firms with
similar costs and rising demand, the agreement is likely to last.

Competing Oligopolies
● The assumption is that when a rival firm increases its price, other companies will
not follow, but if a competing business decreases its price, then others will follow.
This behavior leads to a ‘kink’ in the demand curve.
 Competing excluding price
● Oligopolistic firms don’t like cutting prices because it leads to a price war, where
firms are continuously cutting prices down. They instead compete by creating a
brand, providing customer service, discounts and coupons, and product
differentiation.
● However, bigger firms cut prices so low that the smaller firms can’t compete.
Bigger firms force smaller firms out of business. Then the big firms raise their
prices up.

https://www.studysmarter.co.uk/explanations/microeconomics/imperfect-competition/oligopoly-re
gulation/#:~:text=Ways%20government%20can%20regulate%20monopolies%20and%20oligop
olies%20is%20by%20antitrust,firms%20from%20entering%20the%20market.

https://www.wallstreetmojo.com/oligopoly/#:~:text=What%20are%20the%20characteristics%20o
f,%2C%20and%20non%2Dprice%20competition.

https://www.toppr.com/guides/business-economics-cs/analysis-of-market/oligopoly/

https://www.studysmarter.co.uk/explanations/microeconomics/imperfect-competition/oligopoly/

https://www.intelligenteconomist.com/oligopoly/