An oligopoly is a type of market that has a small number of producers (oligopolists) who dominate the market; typically it is defined as two to eight firms that own at least 80% of the market share. Within the oligopoly, each oligopolist has considerable market power and their own actions will affect the entire market. Consequently, each oligopolist must also take into account the reactions of the other oligopolists to their actions.
In an oligopoly situation, the firms can choose to either collude or not collude. A formal agreement to collusion is called a cartel and in most countries it is illegal. Under collusion, the firms act together like a monopolist and maximize profits in the same way - by restricting output collectively. Each firm then receives their respective shares of the profits based on their share of the market. But, informal collusions can only be enforced by themselves, and often there is an incentive to cheat and to produce more. This can cause the collusion to fall apart if all the firms take the same action, then there is effectively no restriction on output. On the other hand, when firms don't collude they will act competitively. This will cause the market to behave more like monopolistic competition. Here firms can gain profits through their product differentiation. The price in this situation is typically much closer to social equilibrium.
Characteristics of an oligopoly include long run profits, the ability to be price setters, and interdepedence. Firms operate under imperfect competition and will often use non-price competition to acquire greater revenue. An example of oligopolists in Canada are the three companies, Rogers Wireless, Bell Mobility, and Telus Mobility, who share most of the wireless market in Canada.© BrainMass Inc. brainmass.com March 29, 2020, 4:04 am ad1c9bdddf