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Joseph Raphael
09/12/2025
Economics
Oligopoly
75
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9 Dec 2025
•
Understanding Oligopoly: Key Concepts and Theories
Joseph Raphael
@joeraphael9
1 / 3
Understanding Oligopoly Markets
Oligopoly occurs when a handful of firms dominate an entire market, creating a high concentration ratio that gives these companies serious power. Unlike perfect competition, these firms sell differentiated goods and act as price makers rather than price takers.
The most fascinating aspect is interdependence - each firm constantly monitors what competitors are doing before making decisions. This creates price rigidity because changing prices triggers unpredictable responses from rivals, making firms hesitant to rock the boat.
Instead of competing on price, oligopolies focus heavily on non-price competition. Think about how mobile phone companies compete through advertising, brand image, and customer service rather than just cutting prices. The kinked demand curve explains why prices stay sticky - demand becomes very elastic if you raise prices (customers switch) but inelastic if you lower them (competitors follow suit).
Key Insight: Oligopolies often prioritise market share over pure profit maximisation, leading to intense competition in everything except price.
Game Theory and Strategic Behaviour
Game theory perfectly explains the strategic thinking behind oligopoly behaviour - it's like a constant chess match between competitors. The prisoner's dilemma model shows how firms end up in situations where individual rational decisions lead to worse outcomes for everyone.
Looking at the payoff matrix, both firms have a dominant strategy of charging lower prices (90p), even though they'd both earn more by keeping prices high (£1). This interdependence creates three key outcomes in oligopoly markets.
Price rigidity emerges because firms fear triggering price wars, leading to heavy investment in advertising and branding instead. There's always a temptation to collude - forming cartels to fix prices and share markets like a monopoly would.
However, cheating incentives make collusion unstable in the long run. Even when firms agree to keep prices high, each has motivation to secretly undercut competitors for extra market share, which is why competition authorities like the CMA actively monitor these markets.
Key Insight: The prisoner's dilemma explains why oligopolies often get trapped in price competition even when cooperation would benefit everyone.
Performance Evaluation: Competition vs Collusion
Oligopoly markets can swing between two extremes: competitive oligopoly and collusive oligopoly, each producing dramatically different outcomes for consumers and efficiency.
Competitive oligopoly emerges when there are larger numbers of firms, potential new entrants, or homogeneous products. This leads to performance similar to competitive markets - lower prices, innovation, and efficiency improvements. Saturated markets also promote competition as firms fight harder for limited customers.
Collusive oligopoly develops when few firms exist with similar costs, high entry barriers, and ineffective competition policy. Consumer loyalty and consumer inertia make it easier for firms to maintain high prices without losing customers, encouraging tacit or overt price-fixing agreements.
The performance evaluation is straightforward: competitive oligopolies deliver consumer benefits through lower prices and innovation, whilst collusive oligopolies create monopoly outcomes with supernormal profits, static inefficiency, and potential X-inefficiency. The diagram shows how collusive behaviour pushes prices above marginal cost, reducing consumer surplus and creating deadweight losses.
Key Insight: Whether oligopoly benefits or harms consumers depends entirely on whether firms compete aggressively or find ways to collude and share market power.
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This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
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The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user
Understanding Oligopoly: Key Concepts and Theories
Joseph Raphael
@joeraphael9
Oligopoly is one of the trickiest market structures you'll encounter in economics - it's where just a few large firms control most of a market and constantly watch each other's moves. Understanding how these firms behave, compete, and sometimes secretly... Show more
Understanding Oligopoly Markets
Oligopoly occurs when a handful of firms dominate an entire market, creating a high concentration ratio that gives these companies serious power. Unlike perfect competition, these firms sell differentiated goods and act as price makers rather than price takers.
The most fascinating aspect is interdependence - each firm constantly monitors what competitors are doing before making decisions. This creates price rigidity because changing prices triggers unpredictable responses from rivals, making firms hesitant to rock the boat.
Instead of competing on price, oligopolies focus heavily on non-price competition. Think about how mobile phone companies compete through advertising, brand image, and customer service rather than just cutting prices. The kinked demand curve explains why prices stay sticky - demand becomes very elastic if you raise prices (customers switch) but inelastic if you lower them (competitors follow suit).
Key Insight: Oligopolies often prioritise market share over pure profit maximisation, leading to intense competition in everything except price.
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Game Theory and Strategic Behaviour
Game theory perfectly explains the strategic thinking behind oligopoly behaviour - it's like a constant chess match between competitors. The prisoner's dilemma model shows how firms end up in situations where individual rational decisions lead to worse outcomes for everyone.
Looking at the payoff matrix, both firms have a dominant strategy of charging lower prices (90p), even though they'd both earn more by keeping prices high (£1). This interdependence creates three key outcomes in oligopoly markets.
Price rigidity emerges because firms fear triggering price wars, leading to heavy investment in advertising and branding instead. There's always a temptation to collude - forming cartels to fix prices and share markets like a monopoly would.
However, cheating incentives make collusion unstable in the long run. Even when firms agree to keep prices high, each has motivation to secretly undercut competitors for extra market share, which is why competition authorities like the CMA actively monitor these markets.
Key Insight: The prisoner's dilemma explains why oligopolies often get trapped in price competition even when cooperation would benefit everyone.
Sign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
Performance Evaluation: Competition vs Collusion
Oligopoly markets can swing between two extremes: competitive oligopoly and collusive oligopoly, each producing dramatically different outcomes for consumers and efficiency.
Competitive oligopoly emerges when there are larger numbers of firms, potential new entrants, or homogeneous products. This leads to performance similar to competitive markets - lower prices, innovation, and efficiency improvements. Saturated markets also promote competition as firms fight harder for limited customers.
Collusive oligopoly develops when few firms exist with similar costs, high entry barriers, and ineffective competition policy. Consumer loyalty and consumer inertia make it easier for firms to maintain high prices without losing customers, encouraging tacit or overt price-fixing agreements.
The performance evaluation is straightforward: competitive oligopolies deliver consumer benefits through lower prices and innovation, whilst collusive oligopolies create monopoly outcomes with supernormal profits, static inefficiency, and potential X-inefficiency. The diagram shows how collusive behaviour pushes prices above marginal cost, reducing consumer surplus and creating deadweight losses.
Key Insight: Whether oligopoly benefits or harms consumers depends entirely on whether firms compete aggressively or find ways to collude and share market power.
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The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user