From one to many

Now that we have introduced monopolies to our modeling world we can go one step further by introducing oligopolies.

For many markets perfect competition is more of a theoretic benchmark. But the same often also holds for monopolistic competition. While there are markets dominated by one large company many governments aim to prevent a pure monopoly market. Often real world markets are characterized by what economists term oligopolistic competition: a few large companies dominating the market.

The basic concept of oligopoly models is that the firms know that they have an influence on the price and take this into account when maximizing their profits. However, compared to a monopoly each firm in an oligopoly only has partial influence on market prices. Consequently, equilibrium models are a preferred approach to model oligopolistic markets.

There are many different economic oligopoly concepts. Many of them follow the structure that with more firms the results tend towards a more competitive market behaviour and vice versa. Deriving the perfectly competitive and monopoly benchmark therefore provides valuable benchmark conditions for oligopoly models.