Ryker Olsen

Professor Carson
Principles of Economics
25 November 2017
Oligopoly
An oligopoly is a situation in which a few firms dominate a particular market. It is often
difficult to determine the actions of an oligopoly, so economists use certain branches of
mathematics such as game theory. Because of the difficulty of determining the actions of an
oligopoly, some firms might find the idea of collusionacting as a cartelvery tempting.
An oligopoly can be a very powerful force within their particular market. Oligopolies are
generally comprised of 2-4 firms that dominate a particular market. These firms have most of, if
not all, of the sales in a particular industry. Oligopolies exist in many industries, but some of the
most commonly known are the auto, air travel, and oil industries. Various other industries can
also harbor oligopolies, such as the pharmaceutical industry. Barriers to entry such as the
government granting a patent to more than one firm can create an oligopoly, but there are more
factors that can also cause them. Oligopolies have a lot of power in their industries, so it is
important to be able to determine their future actions.
Game theory, although used in economics, is also used in many other industries including
the military. Game theory, in economics, is a branch of mathematics that is used to determine
the actions of oligopolies. Oligopolies use game theory in situations in which players (other
firms) make decisions. They use information obtained to make decisions for themselves and
receive payoffs. Game theory is essentially used by competing firms to make the best decision
possible in a given situation. However, some firms decide that cooperating with other firms is
easier than competing, and participate in collusion.
Even if an oligopoly dominates their particular market, some firms might be tempted to
participate in collusion and act as a cartel. Collusion is a highly illegal case when a group of
firms (an oligopoly in this case) decide to work together to reduce their output while keeping
prices high, acting as an illegal monopoly; a cartel. A cartel earns monopoly-like profits, while
keeping production down to a minimum. Any agreements between firms acting as a cartel are
not legally binding, so firms can turn on other cartel members. Firms that decide to turn on their
fellow cartel members can lower their prices and in turn, increase their profits, but this is not
without its consequences. The rest of the firms within the cartel will immediately match the
new, lower price, making it impossible for the defecting firm to make more profit than the rest of
the cartel. Cartels will match lowered prices, but they will not match raised prices. Because of
the immense power over the market that can come with being in a cartel, government
intervention is needed to dissuade firms from colluding.
An oligopoly, assuming it is acting legally, can coexist with other firms in the industry.
Government regulation such as antitrust laws is important in business to ensure that firms do not
get too large and powerful, or participate in collusion. Oligopolies participating in collusion is
unfair to companies not participating in the cartel, and can dissuade competition (Textbook, p.
180-187).