Oligopoly is the market structure model that describes competition among a handful of competitors sheltered by significant barriers to entry. Oligopolists might produce a homogeneous product, such as aluminum, steel, or semiconductors; or differentiated products such as Cheerios, Coca-Cola, Marlboro, MTV, and Nintendo. Innovative leading firms in the ready-to-eat cereal, beverage, cigarette, entertainment, and computer software industries, among others, have the potential for economic profits even in the long run. With few competitors, economic incentives also exist for such firms to devise illegal agreements to limit competition, fix prices, or otherwise divide markets. The history of antitrust enforcement in the United States provides numerous examples of "competitors" who illegally entered into such agreements. Yet there are also examples of markets in which vigorous competition among a small number of firms generates obvious long-term benefits for consumers. It is therefore erroneous to draw a simple link between the number of competitors and the vigor of competition.
In an industry characterized by oligopoly, only a few large rivals are responsible for the bulk of industry output. As in the case of monopoly, high to very high barriers to entry are typical.
Under oligopoly, the price/output decisions of firms are interrelated in the sense that direct reactions among rivals can be expected. As a result, decisions of individual firms anticipate the likely response of competitors. This competition among the few involves a wide variety of price and nonprice methods of rivalry, as determined by the institutional characteristics of each particular market. Even though limited numbers of competitors give rise to a potential for economic profits, above-normal rates of return are far from guaranteed. Competition among the few can be vigorous.
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