Oligopoly is a market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals' actions into account when developing their own competitive strategies.
Noncooperative oligopoly models show interdependent behavior that assumes that firms pursue profit-maximizing strategies based on assumptions about rivals' behavior and the impact of this behavior on the given firm's strategies.
Cooperative oligopoly models show interdependent behavior that assumes that firms explicitly or implicitly cooperate with each other to achieve outcomes that benefit all the firms.
Kinked demand curve model. An oligopoly model based on two demand curves that assumes that other firms will not match a firm's price increases, but will match its price decreases.
Game theory. A set of mathematical tools for analyzing situations in which players make various strategic moves and have different outcomes or payoffs associated with those moves.
Dominant strategy results in the best outcome or highest payoff to a given player no matter what action or choice the other player makes.
Nash equilibrium. A set of strategies from which all players are choosing their best strategy, given the actions of the other players.
Strategic entry deterrence. Strategic policies pursued by a firm that prevent other firms from entering the market.
Limit pricing. A policy of charging a price lower than the profit-maximizing price to keep other firms from entering the market.
Predatory pricing is lowering prices below cost to drive firms out of the industry and scare off potential entrants.
Cartel is an organization of firms that agree to coordinate their behavior regarding pricing and output decisions in order to maximize profits for the organization.
Joint profit maximization. A strategy that maximizes profits for a cartel, but that may create incentives for individual members to cheat.
Horizontal summation of marginal cost curves. For every level of marginal cost, add the amount of output produced by each firm to determine the overall level of output produced at each level of marginal cost.
Tacit Collusion. Coordinated behavior among oligopoly firms that is achieved without a formal agreement.
Price Leadership. An oligopoly strategy in which one firm in the industry institutes price increases and waits to see if they are followed by rival firms.
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