5.4 Oligopoly

Notes

An oligopoly is a market dominated by a few large firms, with high barriers to entry.

• Examples: airlines, cell phone carriers, car makers, soft drinks.
• Firms are interdependent: each must consider how rivals will react. If one airline cuts fares, others often match.
• A four-firm concentration ratio adds the market shares of the four largest firms. A high ratio means a few firms control most of the market, a sign of oligopoly. Example: shares of $30\%$, $20\%$, $15\%$ and $10\%$ give $75\%$.
• Collusion is an agreement among firms to set prices or limit output. Price fixing is illegal in the United States.
• A cartel is a formal group of producers that agree to coordinate prices and output, such as OPEC for oil-producing countries.
• Game theory studies strategic choices. In a prisoner's dilemma, each firm is tempted to cut prices even though both would earn more if both kept prices high.