Often times oligopolistic industries supply a similar or identical product. These companies tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an association of producers in a certain industry that agree to set common prices and output quotas to prevent competition. The larger the cartel, the more likely it will be that each member will increase output and cause the price of a good to be lower.

The majority of time an oligopoly is used describe a world market; however, the term oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative restaurants or establishments dominate in their fields. A distinguishing characteristic of an oligopoly is the interdependence of firms. This means that any action on the part of one fi

rm with respect to output, price, or quality will cause a reaction on the side of other firms.

The graph of an oligopoly consists of a kinked demand curve. This kinked demand curve is constructive in the assumption that oligopolists match price decreases but not price increases. A company starts off with a given price, Po, and we assume that the quantity demanded at the price for this individual oligopolist is Qo. The starting price of Po is usually consistent and represents a stable market price. If the oligopolist assumes that its rival will not react to its price change than it faces demand curve D1 and D2 with a marginal revenue curve of MR1. However, if the oligopolist assumes that the rival will react then the oligopoly faces the demand curve at D1D2 with a marginal revenue curve at MR2. In a lower price situation, oligopolies tend to assume that if it lowers prices than other companies will follow suit in order not to lose their shares of the market. The initial oligopoly that lowered its prices does not drastically increase its quantity demanded so it faces a demand curve at D1D2. If the oligopoly raises its price over the original price, Po, than the rivals will most likely not follow the chain. A higher price than Po will cause quantity demanded to decrease rapidly. If the demand curve is to the left and above E then it will generally will be elastic, or efficient. Prices above Po are consistent with the relevant demand curve of D1D1, and prices below Po are consistent with the relevant demand curve of D2D2. The kink in the demand curve occurs at the point labeled E. There is also a gap in the marginal revenue curve marked by MR1 and MR2.

Microsoft, the biggest Software Company in the world, has been through a lot of debate of whether they have a monopoly and have the ability to establish an oligopoly industry. Microsoft Corporation has the ability to control software prices in the market. They have in a way an oligopoly in this industry. If Microsoft decides to lower their prices on goods then the other sellers in their industry will also decide to lower their price on goods. Microsoft knows that they have control over the other companies and uses that to their advantage.

Oligopolies tend

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Approximate Word count = 1513
Approximate Pages = 6 (250 words per page double spaced)