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Oligopoly Definition – Characteristics and Examples | Microeconomics

Oligopoly Definition

A market structure in which few sellers control a large portion of it is referred to as an oligopoly. This is a market structure in which there are only a few sellers whose products are either homogeneous or closely related. It is competition among the few. If products are homogenous, it is called perfect monopoly. On the other hand, if products are differentiated, it is called imperfect oligopoly.

An oligopoly occurs when a small number of firms collude, explicitly or implicitly, to restrict production or set prices in order to achieve profits above market levels. An oligopoly can be contrasted with monopolies, in which only one company exists as a producer. Firms in mixed economies often seek the government’s approval for ways to limit competition, and government policy can discourage or encourage oligopolistic behavior. The oil and gas industry, airlines, mass media, automobiles, and telecommunications are all examples of oligopolies. A oligopoly does not imply that there is collusion or coordination.

Oligopoly characteristics

The main Characteristics of oligopoly are as follows:

A few sellers

There will be a few sellers in an oligopoly. They may produce homogeneous products or differentiated products. Each firm has a substantial share of the market supply. Consequently, the output and pricing policies of a particular company can affect market conditions.


As the individual firms determine the market conditions, they are influenced by the price and output decisions of other firms. Additionally, interdependence is also a consequence of substitutability.Due to the fact that a few firms hold a significant share of the total output of the industry in an oligopoly, each firm’s price and output decisions are affected by those of its competitors. In an oligopoly, there is therefore a lot of interdependence among firms. Thus, a firm considers the actions and reactions of its competitors when setting its prices and output levels.


A firm’s policy and fortune are affected by those of other firms. As a result, advertising costs are incurred. Under an oligopoly, advertisements are an unavoidable necessity.A major policy change on the part of one firm can affect other firms in the industry immediately under oligopoly. So rival firms remain vigilant about the moves of the firm that takes initiative and changes its policy all the time. Advertising, therefore, is a powerful tool in the hands of an oligopolist. A company under oligopoly can launch an aggressive advertising campaign with the goal of capturing a large part of the market. This defensive advertising will be resisted by other firms in the industry.

Advertisement is unnecessary under perfect competition, whereas monopolists might have some success with advertising if their product is new or if they have a large number of potential customers who have never tried their product before. In an oligopoly, however, advertising can become a matter of life and death for a firm that does not keep up with its competitors’ advertising budgets, which may result in lost clients going to competing brands.


Since their products are close substitutes, there is fierce competition among the few firms. In an oligopoly, since there are only a few sellers, a move by one seller affects the others. So each seller constantly monitors the moves of its rivals in order to remain on alert and have a counter-move ready. The only way to achieve true competition is to constantly compete against one another, which you can only do under oligopoly.

Lack of uniformity

Oligopoly firms are not uniformly sized. It is possible for some firms to be small and others to be large. It is very rare for sizes to be uniform.

Indeterminate demand

This feature is due to interdependence. Demand cannot be predicted by a single firm. Reducing the price cannot be used to estimate an increase in sales. Therefore, it is difficult to construct a demand curve. The price-output changes of one firm will have a backward and forward effect on those of the other firms. An estimation of the demand curve is, at best, just a guess.

Price rigidity

Due to fear of retaliation by the other firms, the prices cannot be easily changed. As a result, prices remain rigid. Price cuts lead to a price war which benefits no one.

Oligopoly Examples

Oligopoly vs Monopoly

Oligopoly Quiz

Which helps enable an oligopoly to form within a market?

Which best describes how advertising influences consumer choice in an oligopoly?

In the united states, which type of industry is often considered part of an oligopoly?

In an oligopoly, each firm knows that its profits

Oligopoly is a market in which a _____ number of _____ firms compete.

Mutual interdependence means that each firm in an oligopoly

Which of the following is not a characteristic of an oligopoly?

Which helps enable an oligopoly to form within a market

Why is the automobile industry considered an oligopoly?

What generally causes u.s. companies in oligopoly to have similar prices?

One key difference between an oligopoly market and a competitive market is that oligopolistic firms

In markets characterized by oligopoly,

The equilibrium quantity in markets characterized by oligopoly is

When an oligopoly market reaches a nash equilibrium,

In the framework of an oligopoly, what strategy can work like a silent form of cooperation?

One way in which monopolistic competition differs from oligopoly is that


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