Page "Oligopoly" Paragraph 18

Interdependence: The distinctive feature of an oligopoly is interdependence.

Oligopolies are typically composed of a few large firms.

Each firm is so large that its actions affect market conditions.

Therefore the competing firms will be aware of a firm's market actions and will respond appropriately.

This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.

It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives.

For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war.

Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant.

This high degree of interdependence and need to be aware of what the other guy is doing or might do is to be contrasted with lack of interdependence in other market structures.

In a PC market there is zero interdependence because no firm is large enough to affect market price.

All firms in a PC market are price takers, information which they robotically follow in maximizing profits.

In a monopoly there are no competitors to be concerned about.

In a monopolistically competitive market each firm's effects on market conditions is so negligible as to be safely ignored by competitors.