Oligopoly

In an oligopolistic market structure, firms do not encounter a passive environment due to the presence of other firms competing to gain demand (Tirole, 1988). Oligopolistic models incorporate strategic interactions between competitors in the market. There does not exist a single oligopoly theory to explain the implication of such structure. Instead, there is a collection of oligopoly models explaining different instruments used by firms to compete in the market (Belleflamme & Peitz, 2015). The basic models were developed by Joseph Bertrand in 1883 and Augustin Cournot in 1838.   The basic oligopoly models contradict each other regarding market power. The Cournot analysis, based on quantity competition (i.e., the amount of good supplied) concludes that firms enjoy a certain degree of market power, Bertrand’s model, on the other hand, concludes that price competition leads to no market power even if only two firms participate in the market (also referred to as the Bertrand paradox) (Belleflamme & Peitz, 2015). Modern models consider other conditions under which price and quantity competition differ to each other and the market environments that lead to specific strategies.