2.11.5 (HL)—Oligopoly

Oligopoly decisions are interdependent.

A few firms must anticipate rivals’ reactions, so price, advertising and output choices can create strategic outcomes rather than a single independent optimum.

Example

If one airline cuts fares, competitors may match the cut; the first firm’s gain depends on the response, not only on its own demand curve.

State each firm’s action, expected response and resulting payoff before judging cooperation or competition.

Oligopoly does not guarantee collusion; outcomes range from aggressive rivalry to tacit coordination and depend on evidence.

Collusive oligopolists coordinate and may act like a monopoly; non-collusive firms choose independently while anticipating rivals. Interdependence creates price-war risk, incentives to collude and incentives to cheat on an agreement. A payoff matrix records each firm's outcome for paired strategies and reveals dominant strategies or unstable cooperation. Firms use price and non-price competition. A concentration ratio is the combined market share of the largest stated number of firms; higher concentration suggests, but does not prove, greater power.