Briefly outline some of the main models of oligopoly in which firms compete according to output. Hence, discuss the contention that non-collusion is the inevitable outcome of oligopoly.

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Microeconomics

Briefly outline some of the main models of oligopoly in which firms compete according to output. Hence, discuss the contention that non-collusion is the inevitable outcome of oligopoly.

An oligopoly is a market form which is dominated by a small number of sellers (oligopolists). An industry is considered oligopoly when 4 firms control over 40% of the market. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others and one firm's decision will influence, and is influenced, by the decisions of other firms.

An oligopolist will have to plan strategically, taking into account the likely responses of the other market participants. This makes an oligopoly firms profit maximizing decision more difficult than that of a monopoly or competitive firm.

Because relatively few firms compete in an oligopoly, each can influence the price, therefore affecting rival firms. For example, when Sony slashed the European price of its Playstation 2 console in 2002, the price of its rival, the Xbox (produced by Microsoft) was reduced likewise within the hour. An oligopoly firm that ignores its rival behavior is likely to suffer a loss of profit.