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Oligopoly

Shelly, Gary B., Cashman, Thomas J., and Vermaat, Misty E. ful, or at least nonbeneficial. Consequently, there is a kink
(2003). Discovering computers 2004: A gateway to information. in the demand curve because there are asymmetric
Boston: Course Technology.
responses to a firm’s price increases and to its price
decreases. That is, rivals match price falls but not price
Anna Nemesh increases. This leads to “sticky prices,” such that prices in
an oligopoly turn out to be more stable than those in
monopoly or in competition; that is, they do not change
every time costs change. On the flip side, the sticky-price
OLIGOPOLY explanation (formally, the kinked demand model of oli-
gopoly) has the significant drawback of not doing a very
An oligopoly is an intermediate market structure between
good job of explaining how the initial price, which even-
the extremes of perfect competition and monopoly. Oli-
gopoly firms might compete (noncooperative oligopoly) tually turns out to be sticky, is determined.
or cooperate (cooperative oligopoly) in the marketplace. Airline markets and automobile markets are prime
Whereas firms in an oligopoly are price makers, their con- examples of oligopolies. We see that as the new auto
trol over the price is determined by the level of coordina- model year gets under way in the fall, one car manufac-
tion among them. The distinguishing characteristic of an turer’s reduced financing rates are quickly matched by the
oligopoly is that there are a few mutually interdependent other firms because of recognized mutual interdepend-
firms that produce either identical products (homoge- ence. Airlines also match rivals’ fares on competing routes.
neous oligopoly) or heterogeneous products (differenti- In oligopolies, entry of new firms is difficult because
ated oligopoly). of entry barriers. These entry barriers may be structural
Mutual interdependence means that firms realize the (natural), such as economies of scale, or artificial, such as
effects of their actions on rivals and the reactions such limited licenses issued by government. Firms in an oligop-
actions are likely to elicit. For instance, a mutually inter- oly, known as oligopolists, choose prices and output to
dependent firm realizes that its price drops are more likely maximize profits. However, firms could compete along
to be matched by rivals than its price increases. This other dimensions as well, such as advertising, location,
implies that an oligopolist, especially in the case of a research and development (R&D) and so forth. For
homogeneous oligopoly, will try to maintain current instance, a firm’s research or advertising strategies are
prices, since price changes in either direction can be harm- influenced by what its rivals are doing. When one restau-

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558 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION