Oligopoly

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Description of Oligopoly. Explanation.

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Definition Oligopoly. Description.

An Oligopoly is the market situation or structure in which a small number of producing and selling companies supply a high percentage of the market.

Typical for oligopolists is that the decisions and strategies of one firm influence, and are influenced by, the decisions of other firms. As a result, the firms operate economically under imperfect competition. This typically gives them the possibility to make pricing agreements and/or reduce production (Cartel). When one firm has a dominant position in the market the oligopoly may experience price leadership. The firms with lower market shares may simply follow the pricing changes prompted by the dominant firm. On the other hand, sometimes competition between sellers in an oligopoly can be fierce.

As a rule of thumb, when the four largest firms in an industry have a total market share of more than 40%, the four companies making up this market share are considered oligopolists.

The term should not be confused with Oligopsony: the market situation or structure in which the number of buyers are small and powerful.

As a result of fierce competition, in developed countries oligopolies can be found in many sectors. Examples of oligopolies include the aircraft, cellular phones, computer chips, cars, cigarettes and detergents industries.