Explain the concept of oligopoly.

Oligopoly is a market structure characterized by a small number of large firms dominating the industry. In an oligopoly, these few firms have significant market power and can influence the market price and output levels. The key features of an oligopoly include interdependence among firms, barriers to entry, and differentiated or homogeneous products.

Interdependence refers to the fact that the actions of one firm in an oligopoly can have a significant impact on the other firms in the industry. This is because the actions of one firm, such as changing prices or introducing new products, can trigger a competitive response from other firms. As a result, firms in an oligopoly must carefully consider the reactions of their competitors when making strategic decisions.

Barriers to entry are another characteristic of oligopolies. These barriers can be in the form of high start-up costs, economies of scale, patents, or exclusive access to key resources. These barriers make it difficult for new firms to enter the market and compete with the existing oligopolistic firms. As a result, the market is often dominated by a small number of established firms.

Oligopolistic firms can offer either differentiated or homogeneous products. Differentiated products refer to goods or services that are perceived as unique or distinct by consumers, such as branded clothing or smartphones. Homogeneous products, on the other hand, are identical or very similar across different firms, such as basic commodities like wheat or oil. In some cases, firms in an oligopoly may engage in product differentiation strategies to create a perceived uniqueness for their products and gain a competitive advantage.

Due to the interdependence among firms, oligopolies often engage in strategic behavior to maximize their profits. This can include price collusion, where firms agree to fix prices at a certain level to avoid price competition, or non-price competition, where firms compete through advertising, product differentiation, or other marketing strategies. Oligopolistic firms may also engage in predatory pricing, where they temporarily lower prices to drive competitors out of the market.

Overall, oligopoly is a market structure characterized by a small number of large firms with significant market power, interdependence among firms, barriers to entry, and the potential for both price and non-price competition.