When discussing different types of market structures, monopolies are at

one end of the spectrum, with only one seller in monopolistic markets,
and perfectly competitive markets are at the other end, with many
buyers and sellers offering identical products. That said, there is a lot of
middle ground for what economists call "imperfect competition."
Imperfect competition can take a number of different forms, and the
particular features of an imperfectly competitive market has implications
for the market outcomes for consumers and producers.

Oligopoly is one form of imperfect competition, and oligopolies have a

number of specific features:

Several large firms - Oligopolies generally consist of a few large

firms, and this is part of what sets them apart from competitive
markets.

Similar or identical products - While it is possible to have an

oligopoly with slightly differentiated products, firms in oligopolies
usually sell non-differentiated products.

Barriers to entry - There are barriers to entry into an oligopoly,

making oligopolies different from competitive markets with a large
number of relatively small firms.

In essence, oligopolies are named as such because the prefix "oli-" means
several, whereas the prefix "mono-", as in monopoly, means one.
Because of barriers to entry, firms in oligopolies are able to sell their
products at prices above their marginal costs of production, and this
generally results in positive economic profits for firms in oligopolies.

An Oligopoly is a type of market where there are a relatively small

number of firms. The important thing to remember about an oligopolistic
market is that each firms decision impacts another firms decision, so
they are related or dependent on each other. For example, if one airline
were to lower their ticket prices, all other airlines would lower their ticket
prices as well to stay competitive; this dependence on rival firms is
unique to the oligopoly market.

Imagine if you are in a perfectly competitive firm, you are a price taker,
so the decisions of other firms do not impact you. If you are in a
monopolistically competitive market you advertise, research, brand,
change the quality of your product to make an economic profit, you do
not interact directly with competitors. Finally, in a monopoly market you
have no competition so rival firms do not impact your decisions.

How does an oligopoly arise?

It can either happen naturally due to economies of scale, or it can
happen legally due to permits or laws enforced by the government. For
the legal method, there simply needs to be a law in place that limits the
number of firms that can enter a market. For example, some big cities in
the US have 2 or 3 cable TV providers because the city government
limits the amount of firms that can use the existing infrastructure. This
same logic applies for trash collections companies or electricity
providers. The natural way oligopolies can occur has to do with their
long run average total cost curve, and how it is in the best interest of
society to have only a few firms. Consider the following graph:
Here ATC1 is the long run average total cost curve for firm 1, and ATC2
and ATC3 represent the long run average total cost curves for firms 2
and 3 respectively. Not that the minimum of the ATC curve for each firm
occurs at P*, and at this point each firm can make 3,000 units
individually or 9,000 units in total. For this market, it makes sense to
only have 3 firms, because with 3, each firm produces at its minimum
ATC which results in the lowest price possible for consumers. This
natural monopoly occurs because economies of scale are taken
advantage of meaning only 3 big firms results in an efficient outcome.

Another big component of an oligopolistic market is that firms have the

ability to collude. This means that the small number of firms can band
together to form a cartel, and then operate as a monopoly. However, if
firms do not collude, they may compete with each other by lowering their
prices until both firms are producing at their marginal cost, which is
identical to the perfectly competitive outcome.

Because of these characteristics of an oligopolistic market, the resulting

equilibrium price and quantity can vary between the monopoly outcome
at one extreme end, and the perfectly competitive outcome at the other
extreme end. However, most of the time the final result will be
somewhere in between depending on the behaviour of the oligopolist.

Oligopolies also lead to into the study of game theory, which has been
studied extensively by many economists.