1. We have already talked before about the main characteristics of oligopoly which were:
   1. High barriers to entry
   2. A few large firms
   3. Product differentiation
2. However there is another important characteristic which we need to mention, which is interdependence.
   

Interdependence

1. As opposed to perfect competition and monopolistic competition, where one firms action does not have a big impact on the other, in oligopoly each firms operations can impact the other firms.
2. Therefore there should be interdependence in oligopoly, and firms must act together to have higher benefits. Interdependence between oligopoly firms can include:
   1. Pre designed strategy:
      1. In an oligopoly, each firm assumes that if a competitor takes a particular action, it must respond in a specific way.
      2. Therefore considering the action of your competitor in oligopoly markets can be crucial for your growth.
   2. Conflicting actions: Firms in an oligopoly may take conflicting actions; therefore, they might choose to collude in order to avoid such conflicts.

Collusive Oligopoly

1. Collusion: The firms may decide to collude, by e.g fixing a price, and competing in other factors such as quality, to not get into price wars, and earn a more stable revenue.
2. One of the most common types of collusion between firms is:
   1. Cartels: by forming a cartel firms agree to certain points e.g to limit the number of output in the market to limit the competition between them and increase their joint profits.

Non-Collusive Oligopoly

• Non collusive oligopoly refers to the situation where firm in the oligopoly to not collude and don't cooperate in any way to limit competition.

Game Theory(Payoff Matrix)

1. Game theory is a framework designed to analyse the strategic interaction between firm.
2. It allows to see how each firm choose its best strategy in a market situation considering what the competitor has done.
   1. This can be shown through the Payoff Matrix

1. In the image we can see a typical payoff matrix, where:
   1. We have two firms in the market
   2. Each firm can take one of the two actions:
      1. Cooperate
      2. Compete
2. If both firms cooperate:
   1. They both get a payoff of 3.
3. If A competes and B cooperates:
   1. A gets 5 and B gets 0.
4. If both firms choose to compete:
   1. They both get a payoff of 1

Nash Equilibrium

• The Nash Equilibrium as said, is the best possible outcome for both firms at the same time

• In our case the Nash equilibrium will be when both players choose to compete, where each firms payoff will be 1
  • Check yourself, if either firm unilaterally changes its strategy while its competitor's strategy remains unchanged, the firm that deviates will end up worse off

Price vs Non-Price Competition

1. Firms can compete either through price methods or non-price methods.
2. Price Methods: adjust their prices to attract more consumers to increase their revenue
3. Using non-price methods such as:
   1. High quality of goods/services
   2. Better packaging
   3. Better customer service
   4. Better marketing

Concentration Ratio

1. The concentration ratio essentially shows whether there is high level of competition in the market power or not, by using market power as a measure.
   1. Higher ratio: suggests that a few large firms control the market and there is low competition
   2. Lower ratio: suggests that there is high level of competition
2. It is calculated by summing the market shares of the specified large firms to see the percentage of the market that they control
3. High concentration hence signifies that the market may be a monopoly or oligopoly.

Evaluating Oligopoly

Advantages

1. Innovation: high profits earned by oligopoly firms can allow them to invest in R&D and innovate more
2. Economies of scale: access to economies of scale can allow them to have low LARC, and hence lower their prices
3. Market stability: Oligopolies avoid intense competition, leading to price stability

Disadvantages

1. High Barriers to Entry: Its tougher for new firms to entry the market and increase the competition, hence enhance efficiency
2. High Price: By having high market power. firms in oligopoly can charge high prices
3. Low Consumer Choice: When only a few firms control the market, the consumers may have a limited choice.