An oligopoly is a non-competitive market form that is characterized by the presence of few buyers and higher numbers of sellers. In a monopoly, there is only one seller, in a duopoly there are only two sellers and in an oligopoly there are a few more sellers.
In an oligopoly, the companies are able to exercise considerable control over the industry. The companies are able to price the products as they wish. There are barriers to entry in an oligopolistic market as new players find it difficult to enter such an industry.
Dominant Firm Model
This is a type of oligopoly in which the industry comprises one large firm and a group of much smaller firms. The large firm holds most of the market share and the smaller firms together compete for the smaller chunks of profits. The profitability scenario is determined by the bigger company. The bigger company also decides on the pricing of the goods and services. The smaller firms follow suit when pricing their products.
This oligopoly model was developed by economist Antoine Augustin Cournot. It is based on the assumption that the industry is comprised of two equally positioned firms. The model also supposes that the two firms are competing with one another on a quantity basis, and not on price. Both firms produce the same quantities of output. The model functions on the premise that the marginal costs will remain constant and the demand curve will always be linear.
This oligopoly model was developed by economist Joseph Louis Francois Bertrand. This is an extension on the Cournot Model. The assumptions and premises are the same but the model supposes that the firms compete with each other on price.
It assumes that there are two equally positioned firms in the industry and their products are homogenous. The customers wouldn’t mind substituting one product for another. The rationale is that the marginal costs would remain constant and the sales and sales revenues are equally shared by the two firms.
Kinked Demand Model
This model states that there are few firms operating in the industry and if one firm raises its prices, it would lose its customers. The other firms in the industry would continue to sell at the same price and would attract the customers. This model also states that if the firm lowers its prices, the competitors would follow suit and the firm's output would increase only marginally.