What distinguishes an oligopoly from other market structures?

In an oligopoly, the defining characteristic is the existence of a small number of firms that hold significant market power. This market structure allows these firms to influence prices and output levels in the market. Unlike perfect competition, where many small firms operate without any single firm's actions affecting the market, or monopoly, where a single seller dominates, oligopolies are comprised of a few key players whose decisions can impact the entire market.

The firms in an oligopoly are interdependent, meaning the actions of one firm—such as changing prices or altering product offerings—can lead to reactions from the others. This creates a strategic environment in which firms must consider the potential responses of their competitors when making decisions. The concentration of market power in the hands of a few firms allows them to enjoy higher profits than in more competitive environments.

Understanding this distinctive feature of oligopolies is crucial for comprehending various economic phenomena, such as price rigidity and collusion, which are often observed in markets dominated by a small number of firms.