The structure of the market The structure of the oligopoly and the difficulty in predicting production and profitsMarket structure of the oligopolyOligopoly is a market structure in which there are a few firms that produce all or most of the market supply of a particular good or service and whose industry production decisions can influence competitors. Examples of oligopolistic structures are supermarkets, the banking industry and the pharmaceutical industry. Characteristics of oligopoly are: • A small number of large firms dominate the industry • High degree of interdependence: firms' behavior is influenced by what they believe other rival firms might do • High barriers to entry that limit entry of new ventures into the industry, e.g. control of technology • Price stability within markets • Goods are highly differentiated or standardized • Not price competitive, e.g. free delivery and installation, extended warranties • Limited information. Oligopolies do not compete on prices. Price wars tend to lead to lower profits, leaving little variation in market shares. However, companies in oligopolies tend to charge reasonably premium prices, but compete through advertising and other promotional means. Existing firms are safe from new firms entering the market because the barriers to entry into the market are high. For example, if products are heavily promoted and manufacturers already have a number of successful brands, it will be very expensive and difficult for new businesses to establish their own new brand in an oligopolistic market. Since there are few firms in an oligopolistic industry, each firm's output represents a large share of the market. As a result, each firm's pricing and production decisions have a substantial effect on the profitability of other firms. Furthermore, when making price or production decisions, each firm must take into account the likely reaction of rival firms. Because of this interdependence, oligopolistic firms engage in strategic behavior. Strategic behavior is defined as when a company's best outcome is determined by the actions of other companies. Oligopolists are pulled in two different directions, either to compete with each other or to collude with each other. If they collude, they end up acting as a monopoly and therefore maximizing the profits of the sector. However, they are often tempted to compete with each other to get a bigger share of the industry's profits. There are two ways in which companies collude in oligopoly. Collusive oligopoly: Explicit or implicit agreement between existing firms to avoid or limit competition between them..