Oligopoly

• Supernormal profits in oligopoly markets can be used for research and development, leading to dynamic efficiency.
• Oligopoly allows for internal economies of scale, resulting in potential cost reductions and possibly lower prices for consumers.
• Product differentiation in oligopoly increases consumer choice, but there may be limited options between firms.
• Expenditure on marketing in oligopoly can lead to higher costs and potentially higher prices for consumers, with limited benefit to them.

Oligopoly is a market structure characterized by a small number of large firms that dominate the market. These firms compete by offering differentiated products to attract customers and gain market share. Barriers to entry, such as economies of scale and legal protections, make it difficult for new firms to enter the market. Imperfect knowledge and information make it challenging for customers to compare products and prices. Firms in oligopoly have the power to set their own prices and often engage in collusion to reduce competition. However, collusion is regulated and can lead to fines, so firms may engage in tacit collusion instead. Price leadership, price agreements, and price wars are common strategies used by firms in oligopoly. Interdependence between firms is a key feature of oligopoly, leading to the kink demand curve model. This model suggests that demand is price inelastic for price cuts, as all firms would cut prices together, and price elastic for price increases, as customers would switch to rival firms. As a result, prices in oligopoly markets tend to be rigid and do not change frequently. Overall, oligopoly markets are characterized by high market concentration, differentiated products, barriers to entry, interdependence between firms, and price rigidity.