IB Economics 2.11.7 Oligopoly Notes

1. We have already talked before about the main characteristics of oligopoly which were:
   1. High barriers to entry
   2. A few large firms
   3. Product differentiation
2. However there is another important characteristic which we need to mention, which is interdependence.
   

Interdependence

1. As opposed to perfect competition and monopolistic competition, where one firms action does not have a big impact on the other, in oligopoly each firms operations can impact the other firms.
2. Therefore there should be interdependence in oligopoly, and firms must act together to have higher benefits. Interdependence between oligopoly firms can include:
   1. Pre designed strategy:
      1. In an oligopoly, each firm assumes that if a competitor takes a particular action, it must respond in a specific way.
      2. Therefore considering the action of your competitor in oligopoly markets can be crucial for your growth.
   2. Conflicting actions: Firms in an oligopoly may take conflicting actions; therefore, they might choose to collude in order to avoid such conflicts.

Collusive Oligopoly

1. Collusion: The firms may decide to collude, by e.g fixing a price, and competing in other factors such as quality, to not get into price wars, and earn a more stable revenue.
2. One of the most common types of collusion between firms is:
   1. Cartels: by forming a cartel firms agree to certain points e.g to limit the number of output in the market to limit the competition between them and increase their joint profits.

Non-Collusive Oligopoly

• Non collusive oligopoly refers to the situation where firm in the oligopoly to not collude and don't cooperate in any way to limit competition.