How does an oligopoly differ from perfect competition?

An oligopoly is characterized by a market structure that features a small number of firms, each holding significant market power. This structure allows the firms to influence market prices and output levels through their strategic interactions, which can lead to scenarios such as collusion or price-setting behavior. In contrast, perfect competition includes a large number of small firms where individual firms have no market power, meaning they cannot influence prices and must accept the market price determined by supply and demand.

The nature of oligopolies—where a few dominant firms significantly affect the market—leads to less competition compared to perfect competition. In oligopolies, actions by one firm can lead to reactions from others, which is not a consideration in perfectly competitive markets, where firms operate independently of one another. Hence, the distinguishing feature of oligopolies is the concentration of market power among a few dominant firms, making it a fundamental aspect of their definition.