More revision material for A2 students as the CIE exam approaches. Below is a useful mind map which summarises the topic. Quite a popular essay question at A2 which can be linked in with other market structures in imperfect competition.
Oligopoly
Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer like Z (Shell in the UK) wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Mobil, Caltex and BP, may reduce their price in retaliation.
It is a mistake to believe that ALL oligopolists face a KINKED DEMAND CURVE. Oligopolists may either:
a) COMPETE VIGOROUSLY or
b) COLLUDE (e.g. in cartels) or
c) PLAY SAFE (as in Kinked Demand Curve Theory)
The amount an oligopolist sells depends on the prices charged by other producers and their reactions to changes in his own price and output. Therefore, there are several possible solutions. In practice, prices may not vary much in response to changes in costs and demand: hence the kinked demand curve phenomenon.
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