How do firms in an oligopoly market compete with each other?

Firms in an oligopoly market compete with each other through various strategies and tactics. Unlike in a perfectly competitive market, where firms are price takers, in an oligopoly, firms have some degree of market power and can influence prices and market outcomes. Here are some ways in which firms in an oligopoly compete:

1. Price competition: Firms may engage in price wars, where they lower their prices to attract customers and gain market share. This can lead to a downward spiral of prices, reducing profitability for all firms involved.

2. Non-price competition: Instead of competing solely on price, firms in an oligopoly often differentiate their products through branding, advertising, product quality, customer service, or innovation. This allows them to capture a loyal customer base and maintain higher prices.

3. Collusion: In some cases, firms in an oligopoly may collude to reduce competition and increase their collective profits. This can be done through formal agreements, such as cartels, where firms agree to fix prices or limit production. However, collusion is often illegal and subject to antitrust regulations in many countries.

4. Strategic interdependence: Firms in an oligopoly are highly aware of their competitors' actions and reactions. They consider the potential responses of their rivals when making decisions about pricing, production levels, or market entry. This strategic interdependence leads to a complex game theory analysis, where firms try to anticipate and react to their competitors' moves.

5. Barriers to entry: Oligopolistic markets often have high barriers to entry, making it difficult for new firms to enter and compete. Existing firms may use their market power to deter potential entrants through tactics such as predatory pricing or exclusive contracts with suppliers or distributors.

Overall, competition in an oligopoly market is characterized by a delicate balance between cooperation and rivalry. Firms must carefully consider their pricing and non-price strategies while being mindful of their competitors' actions to maintain their market position and profitability.