A market structure dominated by a small number of large firms, selling either identical or differentiated products, and significant barriers to entry into the industry.
This is one of four basic market structures. The other three are perfect competition, monopoly, and monopolistic competition.
The three most important characteristics of oligopoly are:
1. An industry dominated by a small number of large firms
2. Firms sell either identical or differentiated products
3. The industry has significant barriers to entry.
The members of an oligopoly change the nature of a free market. While they can't dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is in all the members' interest to maintain a stable market and profitable prices.
With four or five large firms responsible for most of the output of each industry, avoidance of price competition became almost automatic. If one firm were to lower its prices, it is likely that its competitors will do the same and all will suffer lower profits.
On the other hand, it is dangerous for any single firm to increase its prices since the others might hold their prices in order to gain market share. The safest thing is to never lower prices and only raise prices when there is abundant evidence that the other firms will also raise prices. The largest or lowest-cost or most aggressive firm will often emerge as the price leader. When business conditions permit, the price leader will raise prices with the expectation that the others will follow. The practice of price leadership prevails in many industries:
Competition does not exist in any form. Oligopolies that follow a price leader do not engage in price competition, but they still contest for market share with a variety of forms of non-price competition...