1) Meaning: what is oligopoly?
An oligopoly is a market structure where a few firms dominate the market. Each firm’s decisions significantly affect the others, creating strategic interdependence (stronger and more general than in duopoly).
Examples (typical):
- telecom services,
- automobiles,
- airlines,
- cement, steel,
- FMCG segments with a few major brands.
Core implication: Firms must consider rivals’ reactions, leading to strategic behavior, price rigidity, non-price competition, and sometimes collusion.
2) Key features (CUET high-yield)
- Few large firms (high concentration).
- Products may be homogeneous (steel, cement) or differentiated (cars, phones).
- Significant barriers to entry (scale economies, branding, distribution, regulation).
- Mutual interdependence: each firm’s payoff depends on rivals’ actions.
- Non-price competition is common: advertising, product features, service, warranties.
- Possibility of collusion (explicit or tacit).
3) Why oligopoly is difficult: no single “one-size” model
Unlike perfect competition or monopoly, oligopoly does not have a single universally accepted model because outcomes depend on:
- whether firms compete in price or quantity,
- timing (simultaneous vs sequential),
- whether products are homogeneous,
- whether firms can cooperate (collude),
- capacity constraints,
- repeated interaction.
Therefore, oligopoly is studied via multiple models:
- Cournot, Bertrand, Stackelberg (already introduced under duopoly but extend to oligopoly),
- Kinked demand curve (price rigidity),
- Collusive oligopoly/cartels,
- Basic game theory ideas (dominant strategy, Nash equilibrium).
4) Collusive vs non-collusive oligopoly
4.1 Collusive oligopoly
Firms coordinate to behave like a monopoly:
- restrict output,
- raise price,
- share market/profits.
Forms:
- Cartel: explicit agreement (illegal in many cases).
- Tacit collusion: informal coordination (price leadership, signaling).
4.2 Non-collusive oligopoly
Firms act independently but strategically. Outcomes depend on expectations about rivals’ actions.
5) Kinked Demand Curve model (price rigidity) – very testable
This model explains why oligopolistic prices may be sticky/rigid.
5.1 Assumptions
- If a firm raises price, rivals do not follow → the firm loses many customers → demand is elastic above current price.
- If a firm cuts price, rivals match the cut → the firm gains little market share → demand is inelastic below current price.
Hence the firm’s demand curve is kinked at the prevailing price .
5.2 Implication: discontinuous MR
A kink in AR (demand) implies a gap/discontinuity in MR at the kink output.