Final answer:
An oligopoly is a market structure where a few large firms with market power dominate, and significant barriers to entry prevent new competitors from entering the market easily. Firms are interdependent, often produce differentiated products, and have the ability to influence market conditions and prices due to the limited number of participants.
Step-by-step explanation:
A defining characteristic of an oligopoly is that firms in the industry know they are competing with a few large firms with market power. This market structure is distinguished by the presence of a small number of large firms that dominate the market, which allows them to have some control over the prices and quantities that they produce.
Oligopolies exist due to significant barriers to entry, such as high start-up costs, access to technology, patents, or economies of scale, which prevent newcomers from entering the industry easily. These barriers ensure that oligopolists can earn sustained profits over long periods. Unlike perfect competition, where there is easy entry and exit that prevent long-run profits, or a monopoly, where one company dominates, oligopolies consist of a few firms that may produce similar or differentiated products and are interdependent on each other's actions, especially in terms of pricing and output decisions.
Lastly, oligopolistic firms may not necessarily sell a standardized product; they often engage in product differentiation to gain a competitive edge. However, what is essential in oligopolies is that the actions of one firm considerably influence the other firms in the industry due to the small number of participants.