Oligopoly

Each oligopoly model differs only in what a firm assumes rivals will do. In the kinked demand curve model, a firm believes rivals match price cuts but ignore price increases, so demand is elastic above the prevailing price and inelastic below it. Marginal revenue jumps discontinuously at the kink, and marginal cost can move within that gap without changing the profit-maximising price, which is why posted prices in concentrated industries can look sticky.

Cournot competition assumes each firm chooses quantity taking the rival's quantity as fixed. With linear demand and identical constant marginal cost, each of two firms produces one third of the gap between the demand intercept and marginal cost divided by the slope, so industry output is two thirds of the competitive level and price sits between monopoly and competition. Stackelberg makes the choice sequential: the leader commits first, produces roughly twice the follower's output, and total output rises relative to Cournot. The dominant-firm model gives one large producer the residual demand left after a price-taking fringe supplies what it will at each price; the dominant firm sets marginal revenue on that residual curve equal to its marginal cost, and the fringe accepts the resulting price.

A cartel maximises joint profit by acting as a single monopolist and dividing the restricted output. The problem is that at the collusive price, each member's marginal revenue on an incremental unit exceeds its marginal cost, because the price cut needed to sell more is borne partly by rivals. Every member therefore has a unilateral incentive to produce above quota, and the equilibrium of the one-shot game is the Nash outcome in which all cheat and profits fall toward the non-cooperative level.

What sustains collusion is repetition plus credible punishment. Agreements hold better when firms are few, costs and products are similar, output is observable so deviation is detected quickly, demand is stable rather than lumpy, there is no significant competitive fringe or entrant, and retaliation is expected to be swift. Weakness on any of these dimensions raises the probability of a price war, which is the mechanism behind most real cartel breakdowns.

Analysts proxy market power with concentration measures. The N-firm concentration ratio adds the market shares of the largest N producers; it is simple but ignores how share is distributed inside the group and is insensitive to a merger between two large firms already inside the top N. The Herfindahl-Hirschman Index sums the squared market shares of all firms, so it weights large players far more heavily. On a percentage-point basis, values below roughly 1,500 indicate an unconcentrated market and values above roughly 2,500 a highly concentrated one under US merger guidelines.

Both measures suffer the same defect: they are computed on a defined market, and they say nothing about the threat of entry. A high HHI in an industry with low barriers may generate little pricing power, while a moderately concentrated market protected by licences, networks or capital intensity may support sustained economic profit. Airlines, wireless carriers, credit-card networks, ratings agencies and large-aircraft manufacturing are standard equity-research examples.

You should be able to classify a described market by four attributes: number of sellers, product differentiation, barriers to entry and exit, and pricing power, then justify why oligopoly rather than monopolistic competition or monopoly fits. Expect to solve a small Cournot duopoly numerically, to identify the leader's advantage in Stackelberg, and to explain how the kinked demand curve produces price rigidity without invoking cost changes.

Beyond that, connect structure to profitability. Oligopolists can earn economic profit indefinitely because entry barriers prevent the erosion that occurs under monopolistic competition, but interdependence means the realised outcome ranges from near-collusive to near-competitive depending on discipline among rivals. In practice this feeds directly into equity analysis of pricing power, margin durability and the credit consequences of a price war.