Supermarkets, airlines and phone networks: a handful of big firms share each market.
Three features
A few large firms
The biggest firms hold most of the market.
High barriers to entry
Huge set-up costs, brands, patents.
Interdependence
Each firm's best move depends on what its rivals do.
Two market structures
| Oligopoly | Monopolistic competition | |
|---|---|---|
| Firms | A few, large | Many, small |
| Barriers to entry | High | Low |
| Abnormal profit in the long run | Can last | Competed away |
| Rivals' reactions | Matter a lot | Matter little |
The points to remember
- A concentration ratio is the market share of the largest firms: a four-firm ratio of 80% means the top four sell 80% of the market.
- High ratio, high barriers: the firms can keep abnormal profit in the long run.
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Firms that compete on price risk a price war. Some agree not to: that is collusion.
Two kinds of collusion
Formal: a cartel
Firms openly agree prices or output. Illegal in most countries.
Tacit
No meeting: firms quietly follow the price of a leader.
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Game theory shows why collusion pays, and why it breaks down. Two firms each choose a high or low price.
Our example (made-up numbers): daily profit
| Firm B: high price | Firm B: low price | |
|---|---|---|
| Firm A: high price | A €5k, B €5k | A €2k, B €7k |
| Firm A: low price | A €7k, B €2k | A €3k, B €3k |
Read the matrix
Best together
Both charge high: €5k each, €10k in total, the most for the pair.
Tempted to cheat
If B stays high, A earns €7k by cutting its price, not €5k.
Where they end up
Both fear being undercut, so both go low: only €3k each.
Remember it as: Together: high price. Alone: tempted to cheat. Both cheat: both lose.
Is oligopoly good or bad for consumers? Paper 1 asks this for 15 marks.
The two sides
| Good for consumers | Bad for consumers |
|---|---|
| Economies of scale can lower costs and prices | Collusion: higher prices, less output (P > MC) |
| Abnormal profit funds research and new products | Less choice when a few firms dominate |
| Price wars cut prices, at least for a while | Money spent on advertising, not lower prices |
Weigh it up: Judge with conditions: are the firms colluding or competing? Is the government watching?
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Paper 1 asked this in November 2025, as part (a) for 10 marks.
Explain why a firm in an oligopoly might collude with other firms in the same market.
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See the answer broken into clear points, with guidance on how each point earns marks.
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What the diagram must show
- Industry AR and MR, with MC and AC; axes labelled.
- Joint output Q where MR = MC; P read off AR.
- The abnormal-profit box between P and AC.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |