Final answer:
An oligopoly is a market form where a limited number of large firms dominate an industry, maintaining significant market power and creating high barriers to entry for smaller firms. This causes firms to be interdependent, influencing each other's strategic decisions on output and pricing, and leading them to either collaborate or compete.
Step-by-step explanation:
A oligopoly is a market form in which a market or industry is characterized by a limited number of large firms. In an oligopolistic market, these companies have significant market power, typically controlling 70-80% of the product output, creating high barriers to entry for smaller firms. This power stems from their ability to make strategic decisions regarding output, pricing, and other important aspects, often based on the actions of their competitors within the same market.
Examples of oligopolies include the commercial aircraft industry, where Boeing and Airbus dominate, and the U.S. soft drink market, controlled mainly by Coca-Cola and Pepsi. These firms can differentiate their products, which is not always required for an oligopoly, but it helps them to gain more market power and resist competition. Oligopolistic markets are therefore marked by limited competition, and these firms often face the temptation to either collude, acting like a monopoly to maximize profits, or to compete aggressively by expanding output and cutting prices.
Another important aspect of this market structure is the interdependence of firms. The decisions of one firm, such as price changes or output adjustments, have direct effects on the other firms within the same industry. This interdependence is a significant characteristic of oligopolies, differentiating them from other market forms like monopolistic competition and monopoly.