What defines an oligopoly?

An oligopoly is characterized as a market structure where a small number of sellers have significant control over the majority of the market supply. This concentration allows these few firms to influence prices and output levels, often leading to interdependent decision-making. In an oligopoly, each firm must consider the potential reactions of its competitors when making pricing and production decisions, which can result in strategies such as price collusion or competitive price reductions.

The presence of a limited number of sellers means that each firm's actions can have pronounced effects on the market environment, and tighter regulation may be necessary to prevent anti-competitive practices. This makes oligopolies distinct from other market structures, like perfect competition or monopoly, where the number of sellers differs significantly, affecting the overall market dynamics. Understanding the nature of oligopolies is essential for analyzing markets where few key players dominate and how their behavior can impact consumers and the economy as a whole.