Oligopoly

In an oligopoly, a few firms control most of the market. Examples have included industries such as airlines, telecoms, car manufacturing, soft drinks, commercial aircraft and audit services in many countries.

Because there are few competitors, each firm’s actions directly affect the others. If one airline cuts fares on a route, its rivals may quickly match, so the first airline gains little. This interdependence means firms often avoid price wars and compete through advertising, product features and service instead.

For example, two or three mobile phone networks serving most of a country’s customers might offer similar prices and react quickly to each other’s offers.

Oligopolies can lead to higher prices than in more competitive markets, especially if firms coordinate their behaviour. Explicit agreements to fix prices, called cartels, are illegal in most countries. Even without agreements, firms may follow each other’s prices, which competition authorities monitor. Game theory is often used to analyse how firms in oligopolies behave.