Oligopoly theory

First used by English humanist Sir Thomas More (1478-1535) in Utopia (1516), and later developed by the French economist Antoine Augustin Cournot (1801-1877), oligopoly theory is characterized by a few suppliers producing a heavily differentiated good (differentiated through advertising, marketing and so on).

Cournot asserted that each firm set its price and output on the assumption that its rivals would not react at all. In this situation, each firm decreases its price and increases its output to control a larger market share. The result is a market in which prices are higher and output is lower than they would be in a more competitive market.

Other related theories suggest that:

(1) firms recognize their interdependence and one firm sets the price with other firms following in its wake;
(2) each firm acts as a leader;
(3) firms assume that rivals will follow price changes and so are reluctant to alter them;
(4) firms collude to set a market price and/or quantity.

Also see: collusion theory, monopoly, monopolistic competition, administered pricing, contestable markets theory, structure-conduct-performance theory

J W Friedman, Oligopoly Theory (Cambridge, New York, 1983)

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