oligopoly

Perfect and imperfect oligopolies are often distinguished by the nature of the goods firms produce or trade in.{{Cite journal |last1=Dickson |first1=Alex |last2=Tonin |first2=Simone |date=2021 |title=An introduction to perfect and imperfect competition via bilateral oligopoly |journal=Journal of Economics |volume=133 |issue=2 |pages=103–128|doi=10.1007/s00712-020-00727-3 |s2cid=233366478 |hdl=11390/1197949 |hdl-access=free }}

A perfect (sometimes called a 'pure') oligopoly is where the commodities produced by the firms are homogenous (i.e., identical or materially the same in nature) and the elasticity of substitute commodities is near infinite.{{Cite journal |last=Bain |first=Joe S. |date=May 1950 |title=Workable Competition in Oligopoly: Theoretical Considerations and Some Empirical Evidence |journal=The American Economic Review |volume=40 |issue=2 |pages=35–47 |jstor=1818021 }} Generally, where there are two homogenous products, a rational consumer's preference between the products will be indifferent, assuming the products share common prices. Similarly, sellers will be relatively indifferent between purchase commitments{{Clarify|reason=explain or wikilink|date=July 2023}} in relation to homogenous products.{{Cite journal |last=Stigler |first=George J. |date=February 1964 |title=A Theory of Oligopoly |journal= Journal of Political Economy|volume=72 |issue=1 |pages=44–61 |doi=10.1086/258853 |jstor=1828791 |s2cid=56253880 }} In an oligopolistic market of a primary industry, such as agriculture or mining, commodities produced by oligopolistic enterprises will have strong homogeneity; as such, such markets are described as perfect oligopolies.{{Cite journal |last1=Saitone |first1=Tina L. |last2=Sexton |first2=Richard J. |date=2010 |title=Product differentiation and Quality in Food Markets: Industrial Organization Implications |journal=Annual Review of Resource Economics |volume=2 |issue=1 |pages=341–368 |doi=10.1146/annurev.resource.050708.144154 |via=ResearchGate}}

Imperfect (or 'differentiated') oligopolies, on the other hand, involve firms producing commodities which are heterogenous. Where companies in an industry need to offer a diverse range of products and services, such as in the manufacturing and service industries,{{Cite journal |last1=Sashi |first1=C.M. |last2=Stern |first2=Louis W. |date=1995 |title=Product differentiation and market performance in producer goods industries |journal=Journal of Business Research |volume=33 |issue=2 |pages=115–127 |doi=10.1016/0148-2963(94)00062-J }} such industries are subject to imperfect oligopoly.{{Cite journal |last1=Carter |first1=Colin A |last2=MacLaren |first2=Donald |date=1997 |title=Price or Quantity Competition? Oligopolistic Structures in International Commodity Markets |journal=Review of International Economics |volume=5 |issue=3 |pages=373–385 |doi=10.1111/1467-9396.00063 }}

An open oligopoly market structure occurs where barriers to entry do not exist, and firms can freely enter the oligopolistic market. In contrast, a closed oligopoly is where there are prominent barriers to market entry which preclude other firms from easily entering the market.Organisation for Economic Co-operation and Development (OECD), Competition law & policy roundtable OECD - Oligopoly (1999) https://www.oecd.org/daf/competition/1920526.pdf {{Webarchive|url=https://web.archive.org/web/20230423064231/https://www.oecd.org/daf/competition/1920526.pdf |date=23 April 2023 }} Entry barriers include high investment requirements, strong consumer loyalty for existing brands, regulatory hurdles and economies of scale. These barriers allow existing firms in the oligopoly market to maintain a certain price on commodities and services in order to maximise profits.{{Cite journal |last=Osborne |first=Dale K. |date=August 1964 |title=The Role of Entry in Oligopoly Theory |journal=The University of Chicago Press Journals |volume=72 |issue=4 |pages=396–402}}

Collusion among firms in an oligopoly market structure occurs where there are express or tacit agreements between firms to follow a particular price structure in relation to particular products (for homogenous products) or particular transaction or product classes{{Clarify|reason=explain or wikilink what "transaction or product classes" means|date=July 2023}} (for heterogeneous products). Colluding firms are able to maximise profits at a level above the normal market equilibrium.{{Cite book |last=Koutsoyiannis |first=Anna |title=Modern Microeconomics |publisher=Macmillian Education |year=1979 |pages=237–254 |chapter=Chapter 10 Collusive Oligopoly}}

Interdependence in oligopolies is reduced when firms collude, because there is a lessened need for firms to anticipate the actions of other firms in relation to prices. Collusion closes the gap in the asymmetry of information typically present in a market of competing firms.{{Cite journal |last1=Laffont |first1=Jean-Jacques |last2=Martimort |first2=David |date=1997 |title=Collusion Under Asymmetric Information |journal=Econometrica |volume=65 |issue=4 |pages=875–911 |doi=10.2307/2171943 |jstor=2171943 |url=http://publications.ut-capitole.fr/14924/1/Laffont_14924.pdf |archive-date=20 January 2022 |access-date=10 July 2023 |archive-url=https://web.archive.org/web/20220120050636/http://publications.ut-capitole.fr/14924/1/Laffont_14924.pdf |url-status=live }}

One form of collusive oligopoly is a cartel,"What Is a Cartel? Definition, Examples, and Legality". www.investopedia.com. Retrieved 24 April 2023.{{Better source needed|reason=The current source is insufficiently reliable (WP:NOTRS).|date=July 2023}} a monopolistic organisation and relationship formed by manufacturers who produce or sell a certain kind of goods in order to monopolise the market and obtain high profits by reaching an agreement on commodity price, output and market share allocation. However, the stability and effectiveness of a cartel are limited, and members tend to break from the alliance in order to gain short-term benefits.

A full oligopoly is one in which a price leader is not present in the market, and where firms enjoy relatively similar market control. A partial oligopoly is one where a single firm dominates an industry through saturation of the market, producing a high percentage of total output and having large influence over market conditions. Partial oligopolies are able to price-make rather than price-take.{{Clarify|reason=non-technical language|date=July 2023}}{{Cite journal |last=Markham |first=Jesse W. |date=December 1951 |title=The Nature and Significance of Price Leadership |journal=The American Economic Review |volume=41 |issue=5 |pages=891–905}}

In a tight oligopoly, only a few firms dominate the market, and there is limited competition. A loose oligopoly, on the other hand, has many interdependent firms which often collude to maximise profits. Markets can be classified into tight and loose oligopolies using the four-firm concentration ratio, which measures the percentage market share of the top four firms in the industry."Concentration Ratio Definition, How to Calculate With Formula". www.investopedia.com. Retrieved 24 April 2023. The higher the four-firm concentration ratio is, the less competitive the market is. When the four-firm concentration ration is higher than 60, the market can be classified as a tight oligopoly. A loose oligopoly occurs when the four-firm concentration is in the range of 40-60."Oligopoly". xplaind.com. Retrieved 24 April 2023.

Some characteristics of oligopolies include:

• Profit maximisation
• Price setting: Firms in an oligopoly market structure tend to set prices rather than adopt them.Perloff, J. Microeconomics Theory & Applications with Calculus. page 445. Pearson 2008.
• High barriers to entry and exit:Hirschey, M. Managerial Economics. Rev. Ed, page 451. Dryden 2000. Important barriers include government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favouring existing firms.Negbennebor, A: Microeconomics, The Freedom to Choose CAT 2001{{page needed|date=September 2010}}
• Few firms in the market: When there are few firms in the market, the actions of one firm can influence the actions of the others.Negbennebor, A: Microeconomics, The Freedom to Choose page 291. CAT 2001
• Abnormal long-run profits: High barriers of entry prevent sideline firms from entering the market to capture excess profits. If the firms are colluding in the oligopoly, they can set the price at a high profit-maximising level.
• Perfect and imperfect knowledge: Oligopolies have perfect knowledge of their own cost and demand functions, but their inter-firm information may be incomplete. If firms in an oligopoly collude, information between firms then may become perfect. Buyers, however, only have imperfect knowledge as to price, cost, and product quality.
• Interdependence: A distinctive feature of oligopolies is interdependence.Melvin & Boyes, Microeconomics 5th ed. page 267. Houghton Mifflin 2002 Oligopolistic firms must take into consideration the possible reactions of all competing firms and the firms' countermoves.Colander, David C. Microeconomics 7th ed. Page 288 McGraw-Hill 2008. Every oligopolistic company with strong commodity homogeneity in its industry is reluctant to raise or lower prices, as competing firms will be aware of a firm's market actions and will respond appropriately. Anticipation among firms about potential counteractions leads to price rigidity, with firms usually only willing to adjust prices and quantities of output in accordance with a price leader.{{Cite web |date=20 January 2020 |title=Oligopoly - characteristics |url=https://www.economicsonline.co.uk/Business_economics/Oligopoly.html |access-date=26 April 2021 |language=en-US |archive-date=24 April 2021 |archive-url=https://web.archive.org/web/20210424043132/https://www.economicsonline.co.uk/Business_economics/Oligopoly.html |url-status=live }}{{cite journal |last1=Montez |first1=Joao |last2=Schutz |first2=Nicolas |year=2021 |title=All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices |journal=The Review of Economic Studies |volume=88 |issue=5 |pages=2407–2438 |doi=10.1093/restud/rdaa085}} This high degree of interdependence stands in contrast with the lack of interdependence in other market structures. In a perfectly competitive market, there is zero interdependence because no firm is large enough to affect market prices. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm's effects on market conditions are so negligible that they can be safely ignored by competitors.
• Non-price competition: Generally, the oligopolistic enterprise with the largest scale and lowest cost will become the price setter in this market. The price set by it will maximise its own interests, such that other small-scale enterprises may also benefit.Oligopolistic Price Leadership and Mergers: The United States Beer Industry Oligopolies tend to compete on terms other than price, as non-price competition, such as promotional efforts, is less risky. Along non-price dimensions, collusion is harder to sustain.{{cite book | url=https://www.sciencedirect.com/science/article/abs/pii/S1574073007020154 | doi=10.1016/S1574-0730(07)02015-4 | title=Chapter 15 Antitrust | series=Handbook of Law and Economics | year=2007 | last1=Kaplow | first1=Louis | last2=Shapiro | first2=Carl | volume=2 | pages=1073–1225 | isbn=9780444531209 | archive-date=12 April 2023 | access-date=9 April 2023 | archive-url=https://web.archive.org/web/20230412100817/https://www.sciencedirect.com/science/article/abs/pii/S1574073007020154 | url-status=live }}

Economies of scale occur where a firm's average costs per unit of output decreases while the scale of the firm, or the output being produced by the firm, increases.Khemani, R.S and Shapiro, D.M, Glossary of Industrial Organisation Economics and Competition Law, Organisation for Economic Co-operation and development (OECD), 1990 at page 39. Firms in an oligopoly who benefit from economies of scale have a distinct advantage over firms who do not. Their marginal costs are lower, such that the firm's equilibrium at $MR\; =\; MC$ would be higher.{{Clarification needed|reason=what is MR, MC?|date=July 2023}}{{Cite journal |last=Applebaum |first=Elie |date=December 1981 |title=The Estimation of the Degree of Oligopoly Power |journal=Journal of Econometrics |volume=19 |issue=2–3 |pages=287–299 |doi=10.1016/0304-4076(82)90006-9 |url=https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1578&context=economicsresrpt |via=Elsevier Science Direct |access-date=10 April 2023 |archive-date=19 April 2023 |archive-url=https://web.archive.org/web/20230419043002/https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1578&context=economicsresrpt |url-status=live |url-access=subscription }} Economies of scale are seen prevalently when two firms in oligopolistic market agree to a merger, as it allows the firm to not only diversify their market but also increase in size and output production, with negligible relative increases in output costs.Khemani, R.S and Shapiro, D.M, Glossary of Industrial Organisation Economics and Competition Law, Organisation for Economic Co-operation and development (OECD), 1990 at page 37, 44, 57-58. These sorts of mergers are typically seen when companies expand into large business groups by appreciating and increasing capital to buy smaller companies in the same markets, which consequently increases the profit margins of the business.{{cite journal | doi=10.1590/S0101-73302010000200010 | title=Expansão da privatização/Mercantilização do ensino superior Brasileiro: A formação dos oligopólios | year=2010 | last1=Chaves | first1=Vera Lúcia Jacob | journal=Educação & Sociedade | volume=31 | issue=111 | pages=481–500 | doi-access=free }}

In a market with low entry barriers, price collusion between established sellers makes new sellers vulnerable to undercutting. Recognising this vulnerability, established sellers will reach a tacit understanding to raise entry barriers to prevent new companies from entering the market. Even if this requires cutting prices, all companies benefit because they reduce the risk of loss created by new competition.Explicit vs. tacit collusion—The impact of communication in oligopoly experiments In other words, firms will lose less for deviation{{Clarify|reason=wikilink or wiktionary?|date=July 2023}} and thus have more incentive to undercut collusion prices when more join the market. The rate at which firms interact with one another will also affect the incentives for undercutting other firms; short-term rewards for undercutting competitors are short lived where interaction is frequent, as a degree of punishment can expected swiftly by other firms, but longer-lived where interaction is infrequent.Ivaldi, M., Jullien, B., Rey, P., Seabright, P., & Tirole, J. (2003). The economics of tacit collusion. Greater market transparency, for instance, would decrease collusion, as oligopolistic companies expect retaliation sooner where changes in their prices and quantity of sales are clear to their rivals.

Large capital investments required for entry, including intellectual property laws, certain network effects,{{Cite journal |last=Cabral |first=Luís |date=May 2012 |title=Oligopoly Dynamics |journal=International Journal of Industrial Organization |volume=30 |issue=3 |pages=278–282 |doi=10.1016/j.ijindorg.2011.12.009 |via=Elsevier Science Direct}} absolute cost advantages,{{Cite book |last=Bain |first=Joe S. |title=Barriers to New Competition |publisher=Harvard University Press |year=1956 |chapter=Chapter 5 Absolute cost advantages of Established Firms as Barriers to Entry}} reputation, advertisement dominance,Khemani, R.S and Shapiro, D.M, Glossary of Industrial Organisation Economics and Competition Law, Organisation for Economic Co-operation and development (OECD), 1990 at page 10. product differentiation,Khemani, R.S and Shapiro, D.M, Glossary of Industrial Organisation Economics and Competition Law, Organisation for Economic Co-operation and development (OECD), 1990 at page 14. brand reliance, and others, all contribute to keeping existing firms in the market and precluding new firms from entering.

There is no single model that describes the operation of an oligopolistic market. The variety and complexity of the models exist because numerous firms can compete on the basis of price, quantity, technological innovations, marketing, and reputation. However, there are a series of simplified models that attempt to describe market behavior under certain circumstances. Some of the better-known models are the dominant firm model, the Cournot–Nash model, the Bertrand model and the kinked demand model. As different industries have different characteristics, oligopoly models differ in their applicability within each industry.

With few sellers, each oligopolist is likely to be aware of the actions of their competition. According to game theory, the decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. The following game-theoretical oligopoly models attempt to describe and predict the behaviour of oligopolies:

• Stackelberg's duopoly. In this model, the firms move sequentially to determine their quantities (see Stackelberg competition).
• Cournot's duopoly. In this model, the firms simultaneously choose quantities (see Cournot competition).
• Bertrand's oligopoly. In this model, the firms simultaneously choose prices (see Bertrand competition).

One major difference between varying industries is capacity constraints. Both Cournot model and Bertrand model consist of the two-stage game;{{Clarify|date=July 2023|reason=what's the two stage game?}} the Cournot model is more suitable for firms in industries that face capacity constraints, where firms set their quantity of production first, then set their prices. The Bertrand model is more applicable for industries with low capacity constraints, such as banking and insurance.{{cite book | doi=10.1017/CBO9780511804038 | title=Competition Policy | year=2004 | last1=Motta | first1=Massimo | isbn=9780521816632 }}

{{Main|Cournot competition}}

The Cournot–Nash model is the simplest oligopoly model. The model assumes that there are two equally positioned firms; the firms compete on the basis of quantity rather than price, and each firm makes decisions on the assumption that the other firm's behaviour is unchanging.This statement is the Cournot conjectures. Kreps, D.: A Course in Microeconomic Theory page 326. Princeton 1990. The market demand curve is assumed to be linear, and marginal costs constant.

In this model, the Nash equilibrium can be found by determining how each firm reacts to a change in the output of the other firm, and repeating this analysis until a point is reached where neither firm desires to act any differently, given their predictions of the other firm's responsive behaviour.Kreps, D. A Course in Microeconomic Theory. page 326. Princeton 1990.

The equilibrium is the intersection of the two firm's reaction functions, which show how one firm reacts to the quantity choice of the other firm.Kreps, D. A Course in Microeconomic Theory. Princeton 1990.{{page needed|date=September 2010}} The reaction function can be derived by calculating the first-order condition (FOC) of the firms' optimal profits. The FOC can be calculated by setting the first derivative of the objective function to zero. For example, assume that the firm $1$'s demand function is $P\; =\; (M\; -\; Q\_2)\; -\; Q\_1$, where $Q\_2$ is the quantity produced by the other firm , $Q\_1$ is the amount produced by firm $1$,Samuelson, W & Marks, S. Managerial Economics. 4th ed. Wiley 2003{{page needed|date=September 2010}} and $M=60$ is the market. Assume that marginal cost is $C\_M=12$. By following the profit maximisation rule of equating marginal revenue to marginal costs,{{Clarify|date=July 2023|reason=unsure what this means; wikilink or explain}} firm $1$ can obtain a total revenue function of $R\_T\; =\; Q\_1\; P\; =\; Q\_1\; (M\; -\; Q\_2\; -\; Q\_1)\; =\; MQ\_1\; -\; Q\_1\; Q\_2\; -\; Q\_1^2$. The marginal revenue function is $R\_M\; =\; \backslash frac\{\backslash partial\; R\_T\}\{\backslash partial\; Q\_1\}\; =\; M\; -\; Q\_2\; -\; 2\; Q\_1$.$R\_M\; =\; M\; -\; Q\_2\; -\; 2Q\_1$. can be restated as $R\_M\; =\; (M\; -\; Q\_2)\; -\; 2Q\_1$.

:$R\_M\; =\; C\_M$

:$M\; -\; Q\_2\; -\; 2Q\_1\; =\; C\_M$

:$2Q\_1\; =\; (M\; -\; C\_M)\; -\; Q\_2$

:$Q\_1\; =\; \backslash frac\{M\; -\; C\_M\}\{2\}\; -\; \backslash frac\{Q\_2\}\{2\}\; =\; 24\; -\; 0.5\; Q\_2$ [1.1]

:$Q\_2\; =\; 2(M\; -\; C\_M)\; -\; 2Q\_1\; =\; 96\; -\; 2Q\_1$ [1.2]

Equation 1.1 is the reaction function for firm $1$. Equation 1.2 is the reaction function for firm $2$. The Nash equilibrium can thus be obtained by solving the equations simultaneously or graphically.Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. Prentice-Hall 2001{{page needed|date=September 2010}}

Reaction functions are not necessarily symmetric.Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. Prentice-Hall 2001 Firms may face differing cost functions, in which case the reaction functions and equilibrium quantities would not be identical.

The Bertrand model is essentially the Cournot–Nash model, except the strategic variable is price rather than quantity.Samuelson, W. & Marks, S. Managerial Economics. 4th ed. page 415 Wiley 2003.{{Clarify|date=July 2023|reason=unsure what 'strategic variable' means; wikilink, wiktionary or explain}}

Bertrand's model assumes that firms are selling homogeneous products and therefore have the same marginal production costs, and firms will focus on competing in prices simultaneously. After competing in prices for a while, firms would eventually reach an equilibrium where prices would be the same as marginal costs of production. The mechanism behind this model is that even by undercutting just a small increment of its price, a firm would be able to capture the entire market share. Even though empirical studies suggest that firms can easily make much higher profits by agreeing on charging a price higher than marginal costs, highly rational firms would still not be able to stay at a price higher than marginal cost. Whilst Bertrand price competition is a useful abstraction of markets in many settings, due to its lack of ability to capture human behavioural patterns, the approach has been criticised for being inaccurate in predicting prices.{{cite journal | doi=10.4284/0038-4038-2012.264 | title=A Psychological Reexamination of the Bertrand Paradox | year=2014 | last1=Fatas | first1=Enrique | last2=Haruvy | first2=Ernan | last3=Morales | first3=Antonio J. | journal=Southern Economic Journal | volume=80 | issue=4 | pages=948–967 }}

The model assumptions are:

• There are two firms in the market
• They produce a homogeneous product
• They produce at a constant marginal cost
• Firms choose prices $P\_A$ and $P\_B$ simultaneously
• Firms outputs are perfect substitutes
• Sales are split evenly if $P\_A\; =\; P\_B$There is nothing to guarantee an even split. Kreps, D.: A Course in Microeconomic Theory page 331. Princeton 1990.

The only Nash equilibrium is $P\_A\; =\; P\_B\; =\; \backslash text\{MC\}$. In this situation, if a firm raises prices, it will lose all its customers. If a firm lowers price, , then it will lose money on every unit sold.This assumes that there is no capacity restriction. Binger, B & Hoffman, E, 284–85. Microeconomics with Calculus, 2nd ed. Addison-Wesley, 1998.

The Bertrand equilibrium is the same as the competitive result.Pindyck, R & Rubinfeld, D: Microeconomics 5th ed.page 438 Prentice-Hall 2001.{{Clarify|date=July 2023|reason=unsure what 'competitive result' means; wikilink, wiktionary or explain}} Each firm produces where $P\; =\; \backslash text\{MC\}$, resulting in zero profits. A generalization of the Bertrand model is the Bertrand–Edgeworth model, which allows for capacity constraints and a more general cost function.

The Cournot model and Bertrand model are the most well-known models in oligopoly theory, and have been studied and reviewed by numerous economists.{{cite journal |last1=Ma |first1=Junhai |last2=Wang |first2=Hongwu |date=2013 |title=Complexity Analysis of a Cournot-Bertrand Duopoly Game Model with Limited Information |journal=Discrete Dynamics in Nature and Society |volume=2013 |pages=6 |doi=10.1155/2013/287371 |doi-access=free}} The Cournot-Bertrand model is a hybrid of these two models and was first developed by Bylka and Komar in 1976.{{cite journal |last1=Horton Tremblay |first1=Carol |last2=Tremblay |first2=Victor J. |date=2019 |title=Oligopoly Games and The Cournot–Bertrand Model: A Survey |journal=Journal of Economic Surveys |volume=33 |issue=5 |pages=1555–1577 |doi=10.1111/joes.12336 |s2cid=202322675}} This model allows the market to be split into two groups of firms. The first group's aim is to optimally adjust their output to maximise profits, while the second group's aim is to optimally adjust their prices. This model is not accepted by some economists who believe that firms in the same industry cannot compete with different strategic variables. Nonetheless, this model has been applied and observed in both real-world examples and theoretical contexts.

In the Cournot model and Bertrand model, it is assumed that all the firms are competing with the same choice variable, either output or price. However, some economists have argued that this does not always apply in real world contexts. Economists Kreps and Scheinkman's research demonstrates that varying economic environments are required in order for firms to compete in the same industry while using different strategic variables. An example of the Cournot-Bertrand model in real life can be seen in the market of alcoholic beverages. The production times of alcoholic beverages differ greatly creating different economic environments within the market. The fermentation of distilled spirits takes a significant amount of time; therefore, output is set by producers, leaving the market conditions to determine price. Whereas, the production of brandy requires minimal time to age, thus the price is set by the producers and the supply is determined by the quantity demanded at that price.{{Clarify|date=July 2023|reason=unsure what this paragraph is trying to say}}

{{Main|Kinked demand}}

In an oligopoly, firms operate under imperfect competition. The fierce price competitiveness, created by a sticky-upward demand curve, causes firms to use non-price competition in order to accrue greater revenue and market share.

"Kinked" demand curves appear similar to traditional demand curves but are distinguished by a hypothesised{{Clarify|date=July 2023|reason=what does this mean?}} convex bend with a discontinuity at the bend–"kink". Thus, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. Because of this jump discontinuity in the marginal revenue curve, marginal cost could change without necessarily changing the price or quantity. The motivation behind the kink is that in an oligopolistic or monopolistic competitive market, firms will not raise their prices because even a small price increase will lose many customers. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is, therefore, more price-elastic for price increases and less so for price decreases. This model predicts that more firms will enter the industry in the long run, since market price for oligopolists is more stable.

The kinked demand curve for a joint profit-maximizing oligopoly industry can model the behaviors of oligopolists' pricing decisions other than that of the price leader.File:Kinked demand.JPG. Therefore, the best option for the oligopolist is to produce at point $\backslash text\{E\}$ which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support.{{cite journal | doi=10.2307/1911701 | jstor=1911701 | title=A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles | last1=Maskin | first1=Eric | last2=Tirole | first2=Jean | journal=Econometrica | year=1988 | volume=56 | issue=3 | pages=571–599 }}]]

According to the kinked-demand model, each firm faces a demand curve kinked at the existing price.Pindyck, R. & Rubinfeld, D. Microeconomics 5th ed. page 446. Prentice-Hall 2001. The assumptions of the model are:

• If a firm raises its price above the current existing price, competitors will not follow and the acting firm will lose market share.
• If a firm lowers prices below the existing price, their competitors will follow to retain their market share and the firm's output will increase only marginally.Simply stated the rule is that competitors will ignore price increases and follow price decreases. Negbennebor, A: Microeconomics, The Freedom to Choose page 299. CAT 2001{{Citation |last1=Kalai |first1=Ehud |title=The Kinked Demand Curve, Facilitating Practices, and Oligopolistic Coordination |date=1994 |url=http://link.springer.com/10.1007/978-94-011-1370-0_2 |work=Imperfections and Behavior in Economic Organizations |volume=11 |pages=15–38 |editor-last=Gilles |editor-first=Robert P. |access-date=25 April 2021 |place=Dordrecht |publisher=Springer Netherlands |doi=10.1007/978-94-011-1370-0_2 |isbn=978-94-010-4599-5 |last2=Satterthwaite |first2=Mark A. |series=Theory and Decision Library |editor2-last=Ruys |editor2-first=Pieter H. M.|url-access=subscription }}

If the assumptions hold, then:

• The firm's marginal revenue curve is discontinuous and not differentiable, having a gap at the kink.
• For prices above the prevailing price, the curve is relatively elastic.Negbennebor, A. Microeconomics: The Freedom to Choose. page 299. CAT 2001
• For prices below the point, the curve is relatively inelastic.

The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity Thus, prices tend to be rigid.

Market power and market concentration can be estimated or quantified using several different tools and measurements, including the Lerner index, stochastic frontier analysis, New Empirical Industrial Organization (NEIO) modeling, as well as the Herfindahl-Hirschman index. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilised and is the most preferable ratio for analyzing market concentration.Sys, C. (2009). Is the container liner shipping industry an oligopoly?. Transport Policy, 16(5), 259-270. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, the combined total market share of Verizon Wireless, AT&T, Sprint, and T-Mobile comprises 97% of the U.S. cellular telephone market.{{Cite web |last=Chitkara |first=Hirsh |title=US Cellular and Charter are challenging the Big Four's dominance in the US wireless market |url=https://www.businessinsider.com/us-cellular-charter-challenge-big-four-in-us-wireless-market-2019-10 |access-date=2023-04-09 |website=Business Insider |language=en-US |archive-date=19 April 2021 |archive-url=https://web.archive.org/web/20210419102843/https://www.businessinsider.com/us-cellular-charter-challenge-big-four-in-us-wireless-market-2019-10 |url-status=live }}

Oligopolies are assumed to be aware of competition laws as well as the repercussions that they could face if caught engaging in anti-competition behaviour. In lieu of explicit communication, firms may be observed as engaging in tacit collusion, which occurs through competitors collectively and implicitly understanding that by jointly raising prices, each competitor can achieve economic profits comparable to those achieved by a monopolist while avoiding breaches of market regulations.Green, E. J., Marshall, R. C., & Marx, L. M. (2014). Tacit collusion in oligopoly. The Oxford handbook of international antitrust economics, 2, 464-497.

Competition authorities have taken various measures to effectively discover and prosecute oligopolistic and anticompetitive behaviour.Harrington, J. E. (2006). Behavioral screening and the detection of cartels. European Competition Law Annual, 51-68. The leniency program and screening are currently two popular mechanisms.

Leniency programs encourage antitrust firms to be more proactive participants in confessing collusive behaviours by granting them immunity from fines, among other penal reductions.Harrington, J. (2006). Corporate leniency programs and the role of the antitrust authority in detecting collusion. Competition Policy Research Center Discussion Paper, CPDP-18-E. Leniency programs have been implemented by countries including the US, Japan and Canada. Nonetheless, leniency programs may be abused, their efficacy has been questioned, and they ultimately allow some colluding firms to experience less harsh penalties.Marvão, C., & Spagnolo, G. (2015). Pros and Cons of Leniency, Damages and Screens. CLPD, 1, 47. It is currently unknown what the overall effect of leniency programs is.Choi, J. P., & Gerlach, H. Forthcoming. Cartels and Collusion: Economic Theory and Experimental Economics. Oxford Handbook on International Antitrust Economics (Oxford University Press, Oxford, England).

Screening

There are two screening methods that are currently available for competition authorities: structural screening and behavioural screening. Structural screening refers to the identification of industry traits or characteristics, such as homogeneous goods, stable demand, less existing participants, which are prone to cartel formation. Behavioural screening is typically implemented when a cartel formation or agreement has already been reached, with authorities subsequently looking into firms' data to determine if price variance is low or experiences significant price changes.

Particular companies may employ restrictive trade practices in order to inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion between companies that usually compete with one another, the practice is known as a cartel. An example of an economic cartel is OPEC, where oligopolistic countries control the worldwide oil supply, leaving a profound influence on the international price of oil.{{Cite web |title=OPEC (cartel) - Energy Education |url=https://energyeducation.ca/encyclopedia/OPEC_(cartel) |access-date=2023-04-09 |website=energyeducation.ca |language=en |archive-date=19 April 2021 |archive-url=https://web.archive.org/web/20210419102832/https://energyeducation.ca/encyclopedia/OPEC_(cartel) |url-status=live }}

There are legal restrictions on cartels in most countries, with regulations and enforcement against cartels having been enacted since the late 1990s.Evenett, S. J., Levenstein, M. C., & Suslow, V. Y. (2001). International cartel enforcement: lessons from the 1990s. The World Bank. For example, EU competition law has prohibited some unreasonable anti-competitive practices, such as directly or indirectly fixing selling prices, manipulating market supplies and controlling trade among competitors.{{Cite web |title=Competition policy {{!}} Fact Sheets on the European Union {{!}} European Parliament |url=https://www.europarl.europa.eu/factsheets/en/sheet/82/competition-policy |access-date=2023-04-09 |website=www.europarl.europa.eu |language=en |archive-date=12 July 2018 |archive-url=https://web.archive.org/web/20180712060055/http://www.europarl.europa.eu/factsheets/en/sheet/82/competition-policy |url-status=live }} In the US, the Antitrust Division of the Justice Department and Federal Trade Commission was created to fight collusion among cartels.{{Cite web |title=Reading: Collusion or Competition? {{!}} Microeconomics |url=https://courses.lumenlearning.com/suny-microeconomics/chapter/collusion-or-competition/ |access-date=2023-04-09 |website=courses.lumenlearning.com |archive-date=24 April 2021 |archive-url=https://web.archive.org/web/20210424100924/https://courses.lumenlearning.com/suny-microeconomics/chapter/collusion-or-competition/ |url-status=live }} Tacit collusion is becoming a more popular topic in the development of anti-trust law in most countries.

Competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. Hypothetically, this could lead to an efficient outcome approaching perfect competition.

As competition in an oligopoly can be greater when there are more competitors in an industry, it is theoretically harder to sustain cartels in an industry with a larger number of firms, as there will be less collusive profit for each firm. Consequently, existing firms may have more incentive to deviate. However, empirical evidence has shown this conclusion to be ambiguous.Fonseca, M. A., & Normann, H. T. (2014). Endogenous cartel formation: Experimental evidence. Economics Letters, 125(2), 223-225. Thus, the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition, as they could gain certain marker power by offering somewhat differentiated products.{{Cite web |title=Prerequisites of Oligopoly |url=https://www.coursesidekick.com/economics/study-guides/boundless-economics/prerequisites-of-oligopoly |access-date=2023-04-09 |website=www.coursesidekick.com |archive-date=9 April 2023 |archive-url=https://web.archive.org/web/20230409080626/https://www.coursesidekick.com/economics/study-guides/boundless-economics/prerequisites-of-oligopoly |url-status=live }}{{Clarify|reason=don't understand this paragraph|date=July 2023}}

One possible outcome of oligopoly is the price war. A common aspect of oligopolies is the ability to engage in price competition selectively. Schendel and Balestra contend that at least some players in a price war can profit from participation.Schendel D., P. Balestra. Rational Behavior and Gasoline Price Wars, Applied Economics, 1969. vol 1. – pp. 89-101

Many industries have been cited as oligopolistic, including civil aviation,{{cite journal | doi=10.1162/glep_r_00522 | title=Regulating the Polluters: Markets and Strategies for Protecting the Global Environment. Ovodenko, Alexander. 2017. New York, NY: Oxford University Press | year=2019 | last1=Gama | first1=Adriana | journal=Global Environmental Politics | volume=19 | issue=3 | pages=143–145 | s2cid=211331231 | doi-access=free }} agricultural pesticides, electricity,{{cite journal | doi=10.1016/j.ejor.2019.07.054 | title=Equilibria in investment and spot electricity markets: A conjectural-variations approach | year=2020 | last1=Mousavian | first1=Seyedamirabbas | last2=Conejo | first2=Antonio J. | last3=Sioshansi | first3=Ramteen | journal=European Journal of Operational Research | volume=281 | pages=129–140 | s2cid=201247793 | doi-access=free }}Woohyung Lee, Tohru Naito & Ki-Dong Lee, [https://ideas.repec.org/a/kea/keappr/ker-20171231-33-2-03.html Effects of Mixed Oligopoly and Emission Taxes on the Market and Environment] {{Webarchive|url=https://web.archive.org/web/20200805211501/https://ideas.repec.org/a/kea/keappr/ker-20171231-33-2-03.html |date=5 August 2020 }}, Korean Economic Review, Vol. 33, No. 2, Winter 2017, pp. 267-294: "we have witnessed mixed oligopolistic markets in a broad range of industries, such as oil, electricity, telecommunications, and power plants that emit pollutants during their respective production processes". and platinum group metal mining.{{cite journal | doi=10.1007/s13563-015-0076-x | title=Global PGM mining during 40 years—a stable corporate landscape of oligopolistic control | year=2016 | last1=Ericsson | first1=Magnus | last2=Tegen | first2=Andreas | journal=Mineral Economics | volume=29 | pages=29–36 | s2cid=256205135 }} In most countries, the telecommunications sector is characterized by an oligopolistic market structure.{{cite journal |doi=10.1051/e3sconf/202015903003 |quote=It is considered that the telecommunications market has an oligopolistic structure in most countries. |title=Efficiency of price competition in the telecommunications market |year=2020 |last1=Borodin |first1=Alex |last2=Zholamanova |first2=Makpal |last3=Panaedova |first3=Galina |last4=Frumina |first4=Svetlana |journal=E3S Web of Conferences |volume=159 |page=03003 |bibcode=2020E3SWC.15903003B |s2cid=216529663 |doi-access=free }}

In the European Union, rail freight markets have an oligopolistic structure.{{cite journal |doi=10.3141/2609-04|quote=most of the rail freight markets still have an oligopolistic structure... |title=Application of the Principles of Energy Exchanges to the Rail Freight Sector |year=2017 |last1=Jain |first1=Anuradha |last2=Bruckmann |first2=Dirk |journal=Transportation Research Record: Journal of the Transportation Research Board |volume=2609 |pages=28–35 |s2cid=115709002 }}

In the United Kingdom, the 'Big Four' supermarket chains - Tesco, Asda, Sainsbury's and Morrisons{{Cite news |last=Wood |first=Zoe |date=2022-09-17 |title='Big four no more': where now for UK grocers as Aldi overtakes Morrisons? |language=en-GB |work=The Guardian |url=https://www.theguardian.com/business/2022/sep/17/big-four-uk-grocers-aldi-morrisons-cost-of-living-crisis |access-date=2023-12-24 |issn=0261-3077}} - is an oligopoly.{{Cite web |title=UK Supermarket Oligopoly: Definition, Analysis & Examples |url=https://www.studysmarter.co.uk/explanations/microeconomics/microeconomics-examples/uk-supermarket-oligopoly/ |access-date=2023-12-24 |website=StudySmarter UK |language=en-GB |archive-date=24 December 2023 |archive-url=https://web.archive.org/web/20231224182504/https://www.studysmarter.co.uk/explanations/microeconomics/microeconomics-examples/uk-supermarket-oligopoly/ |url-status=live }} The development of this oligopoly is believed to have resulted in a reduction of competition in the retail sector, coincides with the decline of independent high street retailers, and may also be affecting suppliers and farmers through monopsony.{{Cite web |date=2020-01-20 |title=The supermarket sector |url=https://www.economicsonline.co.uk/business_economics/supermarkets.html/ |access-date=2023-12-24 |website=Economics Online |language=en |archive-date=24 December 2023 |archive-url=https://web.archive.org/web/20231224182504/https://www.economicsonline.co.uk/business_economics/supermarkets.html/ |url-status=live }}

{{See also|Big Five banks of Canada}}

In Canada, supermarkets have been identified as oligopolistic, largely falling under only three chains.{{cite web |last1=Padraig |first1=Moran |title=Soaring food prices, record profits prompt questions about Canada's 'cosy oligopoly' |url=https://www.cbc.ca/radio/thecurrent/canada-food-price-profits-1.6629854 |website=www.cbc.ca |publisher=CBC News |access-date=19 September 2023}}{{cite web |last1=Rieger |first1=Sarah |title=Is Canada Just Three Monopolies in a Trench Coat? |url=https://www.wealthsimple.com/en-ca/magazine/canada-monopolies |website=www.wealthsimple.com |publisher=Wealthsimple Magazine |access-date=19 September 2023 |language=en |date=12 February 2023 |archive-date=20 October 2023 |archive-url=https://web.archive.org/web/20231020034343/https://www.wealthsimple.com/en-ca/magazine/canada-monopolies |url-status=live }} Other industries identified as oligopolistic include banks, telecommunications, and airlines.

In the United States, industries that have identified as oligopolistic include food processing,{{cite journal | doi=10.1111/1477-9552.12219 | title=Stochastic Frontier Estimation of Market Power in the Food Industries | year=2018 | last1=Lopez | first1=Rigoberto A. | last2=He | first2=Xi | last3=Azzam | first3=Azzeddine | journal=Journal of Agricultural Economics | volume=69 | pages=3–17 }} funeral services,{{cite journal |last1=Lares |first1=Jennifer DiCamillo |last2=Lehenbauer |first2=Kruti |title=Funeral Services: The Silent Oligopoly: An Exploration of the Funeral Industry in the United States |journal=RAIS Journal for Social Sciences |date=21 November 2019 |volume=3 |issue=2 |pages=18–28 |url=https://journal.rais.education/index.php/raiss/article/view/72}} sugar refining,Alfred S. Eichner, The Emergence of Oligopoly: Sugar Refining as a Case Study (Johns Hopkins University Press, 2019). beer making,Nathan H. Miller, Gloria Sheu & Matthew C. Weinberg, [https://www.ftc.gov/system/files/documents/public_events/1494697/weinbergmillersheu.pdf Oligopolistic Price Leadership and Mergers: The United States Beer Industry] {{Webarchive|url=https://web.archive.org/web/20200521142839/https://www.ftc.gov/system/files/documents/public_events/1494697/weinbergmillersheu.pdf |date=21 May 2020 }} (14 June 2019). pulp and paper making,Eddie Watkins, [https://econ.unc.edu/files/2018/10/Watkins-Recycling-Comp.pdf The Dynamic Effects of Recycling on Oligopoly Competition: Evidence from the US Paper Industry] {{Webarchive|url=https://web.archive.org/web/20200805233540/https://econ.unc.edu/files/2018/10/Watkins-Recycling-Comp.pdf |date=5 August 2020 }} (29 Oct 2018). mobile network carriers.{{Cite web |last=Hazlett |first=Thomas W. |last2=Crandall |first2=Robert W. |date=2024 |title=No “Cozy Triopoly” |url=https://www.cato.org/regulation/summer-2024/no-cozy-triopoly#consolidation-of-the-wireless-industry |access-date=2025-05-09 |website=www.cato.org}}

== See also ==

{{Div col|colwidth=30em}}

• Big business
• Conjectural variation
• Market failure
• Monopoly
• Monopsony
• Oligopolistic reaction
• Oligopsony
• Perfect competition
• Planned obsolescence
• Prisoner's dilemma
• Simulations and games in economics education
• Swing producer
• Unfair competition

{{Div col end}}

{{Reflist|group=note}}

{{Reflist|30em}}

{{Commons category|Oligopoly}}

{{Wiktionary}}

• Bayer, R. C. (2010). [http://isiarticles.com/bundles/Article/pre/pdf/18153.pdf Intertemporal price discrimination and competition]. Journal of economic behavior & organization, 73(2), 273–293.
• Harrington, J. (2006). Corporate leniency programs and the role of the antitrust authority in detecting collusion. Competition Policy Research Center Discussion Paper, CPDP-18-E.
• Ivaldi, M., Jullien, B., Rey, P., Seabright, P., & Tirole, J. (2003). The economics of tacit collusion.

{{Microeconomics}}

{{Aspects of capitalism}}

{{Economics}}

{{Authority control}}

{{DEFAULTSORT:Oligopoly}}

Category:Market structure