Chapter Introduction
642
MODULE 64
Introduction to Oligopoly
In this Module, you will learn to:
Explain why oligopolists have an incentive to act in ways that reduce their combined profit
Explain why oligopolies can benefit from collusion
AP® Exam Tip
When you see the term “mutual interdependence” or “price leadership” on the AP® exam, be prepared to answer a question on oligopoly, because this market structure is characterized by interdependence among firms.
Firms are interdependent when the outcome (profit) of each firm depends on the actions of the other firms in the market.
In Module 57 we learned that an oligopoly is an industry with only a few sellers. But what number constitutes a “few”? There is no universal answer, and it is not always easy to determine an industry’s market structure just by looking at the number of sellers. Economists use various measures to gain a better picture of market structure, including concentration ratios and the Herfindahl–
In addition to having a small number of sellers in the industry, an oligopoly is characterized by interdependence, a relationship in which the outcome (profit) of each firm depends on the actions of the other firms in the market. This is not true for monopolies because, by definition, they have no other firms to consider. On the other hand, competitive markets contain so many firms that no one firm has a significant effect on the outcome of the others. However, in an oligopoly, an industry with few sellers, the outcome for each seller depends on the behavior of the others. Interdependence makes studying a market much more interesting because firms must observe and predict the behavior of other firms. But it is also more complicated. To understand the strategies of oligopolists, we must do more than find the point where the MC and MR curves intersect!