Oligopolies are market structures where a small number of sellers dominate a particular industry. The smaller number of sellers means that each of these participants are quite aware of each other’s offerings and strategy. Any long term strategy is constituted only after taking into account that of others (Vives, 1999).
The profit maximization condition is that production happens where marginal revenue becomes equal to marginal costs. Such a setup is a price setter and not a price taker, because the sellers hold power and privilege upon the industry.
There are very high entry barriers here, ensuring the small numbers of the sellers and there is obvious motivation on the part of the sellers to keep the club restricted. These can again be from
economies of scale, technological domination, patents and copyrights and strategic partnerships among these sellers to acquire or put out of business any startups.
Of course, the government may also favor the existing players. Because they are so few, actions taken by one affect all the others.
Other characteristics include long run profits from the price setting that these firms engage in. However, product may be differentiated (or could be similar). Also, while there is general awareness, there may not
be perfect information. Neither sellers can know everything about the affairs of each other, nor can consumers as regards price, cost and quality.
However what sets an oligopoly apart is the interdependence exhibited here. There is usually a synchrony between the actions of all the players because they can all affect market conditions.
Reactions of each other are important when implementing a policy.
Examples include when increasing prices, being sure that others will follow suit to not lose business to others and vice versa. There are also forms of non-price competition; this includes loyalty schemes, product differentiation etc.
The breakup of communism and the resulting privatization of the Russian oil industry was an example of oligopoly, which created a handful of oligarchs.
The role an oligopoly plays is very similar to that of a monopoly, where protectionism is needed or there are significant industry related risks, trade secrets, technological prowess needed etc (Depken, 2005).