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Oligopoly is a market structure, in which a few sellers dominate the sales of a product and the entry of new sellers is difficult or impossible. The product can be either differentiated or standardized. In oligopolistic markets, at least some firms can influence price by virtue of their large shares of total output produced. The sellers are aware of their interdependence and a change in one firm's price or output causes a reaction by competing firms. The response an individual seller expects from its rival is a crucial determinant of its choices.
Due to interdependence there is an uncertainty about the reaction patterns of rivals. A wide variety of reaction patterns become possible and accordingly a large variety of models of price- output determination may be constructed. The actual solution is, therefore, indeterminate unless we specify the particular reaction pattern of the rivals.
The concept of kinked demand curve was originally used to explain why, in an oligopoly market, the price, which has been determined on the basis of average cost principle, would tend to remain rigid. The demand curve faced by an individual seller has a kink at the initial price- quantity combination. The kinked shape of the demand curve is based on the assumption that the rivals react differently to a rise in price or to a fall in price. It is also assumed that an individual seller increases prices for its goods so that the sales of the seller increasing the price will be reduced considerably. This means that the demand curve is relatively elastic for a rise in price. On the other hand, it is assumed that when a single seller reduces the price, other sellers will also reduce the price so that the seller who reduces the price first cannot gain much for a fall in the price. The kinked demand curve is, therefore, based on the assumption that rise in price by one seller will not be followed by a rise in the price of the other sellers while a fall in the price of one seller will be followed by the corresponding fall in the price by others.
One of the important features of an oligopolistic market is uncertainty arising from oligopolistic interdependence. To avoid this uncertainty, the oligopolists may enter into collusive agreements. Cartels refer to direct agreements among competing oligopolists with the aim of reducing uncertainty. The aim of the cartel is the maximization of joint profits.
Economic life is characterized by many situations of strategic interaction among firms, individuals, governments, or others. Game theory analyzes the strategic choices made by competitors in a conflict situation that jointly affect each participant.