Describe the market form known as Oligopoly

1. Long Term Equilibrium Diagram

2. Assumptions
To understand this market it is necessary to make a number of assumptions

Competition by the Few The market is dominated by a few large suppliers who have the power to influence the selling price.
Firms are Interdependent This means that oligopolistic firms will be affected its rivals decisions. If one firm decides to reduce its price then its competitors will react to this situation.
Products are similar Products are similar or close substitutes
Firms are Predatorial All firms are keen to increase their market share
Firms are Vigilant Firms are very alert to any changes that might take place in the market
Entry and Exit There may be some collusion by those already in the market in order to exclude other firms from entering
Aim The aim of all firms is to maximise profits

3. Equilibrium
In the diagram above an electric appliances firm, Europower, sells 10 microwave ovens for £200 each. In order to increase his sales, and thus increase market share, he increases his price. However, his competitors do not follow his example and retain their prices at the lower level. As a result his sales fall. Realising his error he returns to point K selling 10 microwave ovens at £200. His next move is to reduce his price causing his competitors to react by reducing their prices also. Europower gain so little from their move that they decide to restore the £200 price tag bringing them to point K again. They have come to realise that there is nothing to be gained by changing prices as there is no market gain. This gives rise to a situation known as Price Rigidity.

4. Non-Price Competition
In order to expand their position they engage in Non-Price Competition. This is a situation where firms may adopt a competitive strategy in respect of other factors which influence demand. Below are some examples
Sponsorship of sporting events
After sales service
Free offers
Late night shopping
Weekend shopping

5. Examples
Examples of firms that form oligopolies are

Petrol Stations
Supermarkets
Electrical Appliance Stores