Oligopoly refers to a market form in which a particular market is dominated by a small group of sellers.
In other words oligopoly can be defined as a market situation that is characterized by few sellers dealing either in identical or differentiated products Moreover, under oligopoly; there are restrictions to entry and exit of organizations.
One of the most important characteristics of an oligopoly market is the mutual interdependence of organizations. This implies that each organization operating under oligopoly must take into account the expected reactions of other organizations in the market while making pricing and output decisions.
For example, in oligopoly, if an organization lowers down its prices, then it is most likely to capture the highest market share. Consequently, the sales of the organization would increase. However, this would adversely affect the sales of other organizations existing in the market. As a result, other organizations would also lower down their prices. Therefore, price and output are said to be indeterminate under oligopoly.
Generally, the price and output of an organization are determined by considering two market forces, namely, demand and supply. In other market structures, such as perfect competition, organizations make decisions without taking into account the behavior of rival organizations.
However, pricing and output decisions of an oligopolistic organization are influenced by the decisions of rival organizations. Therefore, there is no specific theory propounded by economists that can explain price and output determination under oligopolistic market situations.
Although economists have developed certain models that help organizations to make efficient pricing and output decisions under oligopoly. Some of the popular models of oligopoly include Sweezy’s kinked demand curve model, collusion model, and price leadership models.