The assumptions of oligopoly:
An oligopoly is when there are few firms that dominate de industry
A large proportion of an industry`s output is shared by a small number of firmsConcentration ratios are expressed in the form CRX where X represents the number of largest firms. If there is a higher percentage, this will mean that the more concentrated the market will be for that Xnumber of firms.
Oligopolistic industries may produce almost identical products, such as petrol where only the name of the producer industry varies or it may also produce highly differentiatedgoods such as motor cars.
In oligopolies, there are distinct barriers to entry (large scale production or strong branding of the dominant firms). In some oligopolies there may be low barriers to entry.The key feature of oligopolies is that there is interdependence. Because there is a small number of large firms, these need to take careful notice of each other`s actions. This may lead to firms tocollude avoiding unexpected outcomes, maximizing industry profits. However, there is strong price rigidity where prices tend to change much less than in more competitive markets.
Collusive andNon-collusive Oligopoly
Collusive oligopoly: exists when the firms in an oligopolistic market collude to charge the same prices for their products, acting as a monopoly. Try to keep prices stable in orderfor the situation of monopoly will remain.
Formal collision: Firms openly agree on the price that they will charge. Because there are higher prices with less output for consumers, this will beusually banned by governments.
Tacit Collision: Firms in an oligopoly charge the same price without any formal collusion. A firm may charge the same price as another by looking at the prices of thedominant firms or main competitors.
Non-collusive oligopoly: exists when the firms in an oligopoly do not collude therefore they need to be very aware of other firm`s activity regarding making...