An oligopoly is another type of market structure. It means that there are several firms in the market, which are dominating. The concentration ratio is high.
The other characteristics would be:
- high barriers to entry - the dominant firms are not likely to give away their market share to other firms, as this might lead to the loss of their position as price makers.
- price stability for long periods. this is because of the kinked demand curve, which actually explains the behaviour of dominating firms in an oligopolistic market. if a firm rises the price, it is likely to lose its customers, who will probably switch to a cheaper service\product provided by its competitor. this will lead to a loss in a firm's market share. lowering the price will lead to a war price, where eventually all the firms will lose out. The behaviour of oligopolistic firms is difficult to predict, that's why the game theory concept, which models the behaviour of firms. It is also know as prisoners dilemma, which is easier to understand for nom-economists. Also I suggest you to read this post, which talks about the main idea of the game theory and its founder, John Nash.
now, coming back to the kinked demand curve:
lol this diagram, nicely presented by tutor2u website, is actually wrong! the marginal revenue curve, which is under an oligopolists' demand curve, should continue starting from Q1 point, not higher that point.
On the diagram we can see that firstly the demand curve is relatively elastic, and the, at a certain point, where the price is set, it becomes relatively inelastic. This actually illustrates what I've said before about pricing strategies of an oligopolistic market.
However, firms might agree with each other about pricing in order to gain higher levels of profits, but it's illegal and restricted by the Competition Commission. Although the firms can still tacticly raise the prices with an unwritten agreement with each other. This is called a collusion, and it's really difficult to prove its existance so the firms cant actually be fined.
- because of inability to play with the price, firms usually have a non-price competition, which includes branding, location, ASS (After Sales Service), product range etc. Everything that might attract customers except for price.