Oligopoly

Characteristics of oligopoly markets:

1 Small number of potential sellers.

2 Products are close substitutes, may be differentiated by brand or homogeneous and unbranded.

3 High entry barriers, fairly high costs and significant barriers to competition.

4 Substantial pricing power.

5 Non-price strategies (marketing, features, etc).

The most distinctive characteristic of oligopoly markets is the small number of firms that dominate the market. There are so few firms in the relevant market that their pricing decisions are interdependent.

[Practice Problems] In an industry comprised of three companies, which are small-scale manufacturers of an easily replicable product unprotected by brand recognition or patents, the most representative model of company behavior is:

A.       oligopoly.

B.        perfect competition.

C.        monopolistic competition.

[Solutions] B

The credible threat of entry holds down prices and multiple incumbents are offering undifferentiated products.