What is an oligopoly?

An oligopoly is characterized by a market structure that consists of a small number of firms that hold significant market power. In this type of market, the actions of one firm can have a substantial impact on the others, leading to interdependent decision-making regarding pricing, output, and marketing strategies. This concentration of market power often results in limited competition, which can lead to higher prices and less innovation compared to more competitive market structures.

Understanding that an oligopoly involves a few dominant firms helps to clarify its unique features, such as the potential for collusion where firms may work together to set prices or quotas, though this practice is often restricted by antitrust laws. The significant influence of each firm within an oligopoly creates a marketplace that is distinct from those dominated by a single seller, a wide array of companies, or situations where firms do not retain any market power at all.