Oligopoly

Oligopoly is a market structure characterised by a small number of large firms that dominate the market, leading to strategic interdependence. Unlike perfect competition or monopoly, firms in an oligopoly must consider the likely reactions of their rivals when making decisions about price, output, advertising, or product differentiation. This interdependence is the defining feature of oligopoly and gives rise to a range of possible outcomes, from collusive behaviour (where firms act together to maximise joint profits) to intense non-price competition. The study of oligopoly is crucial for understanding real-world markets such as banking, supermarkets, mobile networks, and airlines, where a few firms hold significant market power.

In the OCR A-Level Economics specification, oligopoly is a key topic within the 'Microeconomics' component. You will need to understand the characteristics of oligopoly, including high barriers to entry, product differentiation, and the importance of non-price competition. The kinked demand curve model is a traditional tool used to explain price rigidity in oligopolistic markets, while game theory, particularly the prisoner's dilemma, provides insights into strategic decision-making and the tension between cooperation and self-interest. You should also be able to evaluate the pros and cons of oligopoly for consumers and the economy, including the potential for collusion (both overt and tacit) and the role of competition policy.

Mastering oligopoly is essential because it bridges the gap between theoretical models and real-world market behaviour. It allows you to analyse why prices in some industries remain stable for long periods, why firms engage in heavy advertising and branding, and why governments intervene to prevent anti-competitive practices. This topic also develops your ability to think strategically and apply game theory to economic situations, skills that are highly valued in both exams and further study.