Oligopoly
Market Failure: Market Power
AO2·AO3·AO4·Diagram required·HL
Syllabus requirement
Few large firms, high barriers, interdependence. Includes collusive and non-collusive behavior, price wars, collusion/cheating, and concentration ratios.
Assessment objectives
AO2 Application and AnalysisAO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: Collusive oligopoly acting like a monopoly; simple game theory payoff matrix to show interdependence, risk of cheating, and price wars.
Higher LevelThis topic is assessed at HL.
Summary
Oligopoly is a market structure dominated by a few large firms with significant market power. Firms in oligopolistic industries face a trade-off between colluding to act like a monopoly (raising price and reducing output) and competing (leading to price wars); they also show mutual interdependence where each firm must anticipate rivals’ reactions. Understanding oligopoly explains why markets may be allocatively inefficient and why antitrust enforcement targets cartels and tacit collusion.
