Oligopoly

Five runners stretch at the starting line, all poised to win the race. No doping allowed, but let’s face it: every runner is incentivized to do everything she can to win, which includes doping. The runners are continually sizing each other up, seeing what the competition did (shaving every tiny hair, getting the latest-tech shoes, etc.) to keep up with the competition.

Oligopolies are like these runners. There’s a handful of firms dominating a market, all competing against each other, constantly sizing each other up. Oh, the other mega running shoe store is having a sale? We'd better have one too, so we don’t lose out on customers. Oh, the other guys are raising prices on their top running shoes? We can too, which will increase our profits...great!

Runners aren’t allowed to dope, but they’re incentivized to. Same goes for firms in an oligopoly, but with collusion. Firms in an oligopoly could all price-compete, or…they can fix prices at a higher rate, but only if all the firms in the market agree to keep prices artificially high.

There are antitrust laws to prevent things like price fixing, restricting output on purpose...actions by firms that make prices higher for consumers than they would be in a more competitive market. When a few firms dominate a market and collude together rather than compete, they’re officially a cartel. OPEC is an example of a no-shame, out-of-the-closet cartel: an oil oligopoly that restricts supply to influence the price of oil everywhere. Cartels are a big no-no in the U.S. because of antitrust legislation.

Of course, if the three mega shoe sellers in the U.S. all set their running shoes to be $300, rather than the competitive, free market price of $150, they each have the incentive to undercut each other, i.e. the prisoner’s dilemma. Oligopolies can go through this rollercoaster of making prices artificially high together, then undercutting each other, then raising prices again. Getting dizzy yet?