What is the nature of uncertainty in a model of oligopoly, and how does the notion of conjectural variation help in modeling this. Hence, using the Cournot model of duopoly, discuss the contention that collusion is the inevitable outcome o

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Microeconomic Analysis

3. What is the nature of uncertainty in a model of oligopoly, and how does the notion of 'conjectural variation' help in modeling this. Hence, using the Cournot model of duopoly, discuss the contention that collusion is the inevitable outcome of oligopoly.

An oligopoly is a market form which involves the domination of a market by a small number of economically powerful firms (sellers/oligopolists). A quantitative description of oligopoly often used is the four-firm concentration ratio, expressing the market share of the four largest firms in an industry as a percentage. For example, as of fourth quarter 2008, Verizon, AT&T, Sprint Nextel, and T-Mobile together control 89% of the US cellular phone market. An industry is considered oligopoly when 4 firms control over 40% of the market. Another example of an oligopoly industry is the soft drinks market, dominated by firms such as Coca-Cola and Pepsi. An oligopoly is a prevalent form of market structure due to barriers of entry making it very difficult for new firms to enter. These barriers may be "natural", such as the need to spend money for name recognition. Or they may be "strategic", such as a firm threatening to flood