An oligopolistic market structure is such that the top 5 firms have a combined

concentration ratio of over 50% of the entire market. This leads to high barriers to
entry and/or exit as they intend to maintain their high market share, preventing new
entrants in the market. Also as a result of their differentiated products, they have
price setting power, enabling them to choose pricing of products. However, due to
existence of other large rivals they are forced to set prices in accordance to
competitors and so the market structure is said to be that of interdependence.

The manner in which firms are likely to compete is dependent on certain factors. If
long run average costs of the firms are extremely different and products are fairly
similar, with relatively low barriers to entry and exit and potential constant
regulation by gov. on collusive behaviour, the oligopolistic market is likely to be
competitive oriented, both regarding price and non-price factors. The factors
mentioned make it highly contestable and less difficult for competitors to enter the
market, so if prices are kept high to attain supernormal profits, competitors may hit-
and-run, entering the market to make supernormal profits, than leaving when it
returns to long run state similar to that of monopolistic competition as illustrated on
the diagram above.

This however does not occur as large incumbent firms within the market, have due
to large market share and large levels of output already exploited economies of scale
to ensure massive reduction in long run average costs. As a result, existent firms by
setting market prices are limit pricing whereby prices set are below costs for new
entrants, and so lack incentive to enter the market with unlikelihood of attaining
supernormal profits incumbent firms are making.

Another form of competition is when a collusive oligopoly exists. This is when due to
product differentiation, and therefore brand loyalty, and relatively high barriers to
entry firms have much greater market price setting power able to set prices above
allocative efficiency by restricting their levels of output, in the long term very similar
to a monopoly. As illustrated on the payoff matrix, the dominant strategy for two
firms competing with one another with no contact would be high output, high
output both making revenues of 80 million. However, if they were to collude, which
we assume they do due to low regulation existent in a market and inelastic demand
for the product, they could make revenues of 100 million each if they were to
collaborate to reduce output. This greatly incentivises collusion in the market, by
fixing prices through the reduction of output.

However, price fixing in such manner, overt collusion is illegal. The formation of a
cartel is greatly against consumer interests as although in the short run they may
offer lower prices, they tend to profit maximize in the long term.