In an oligopoly, what is a defining feature of the market?

In an oligopoly, a key characteristic is that a small number of producers control the supply of a product or service and can influence market prices. This concentration of market power among a few firms means that the decisions made by one firm can significantly affect the others, leading to interdependence in pricing and output decisions.

Firms in an oligopolistic market typically produce similar or slightly differentiated products, which allows them to compete on factors other than price, such as marketing and product features. Because there are only a few players, they closely monitor each other's actions, which can lead to either cooperation (e.g., forming cartels) or competition (e.g., price wars). This interaction and reliance on each other's pricing strategies underscore the defining nature of oligopoly in controlling supply and influencing market prices.

The other choices reflect characteristics of different market structures. A large number of small firms is indicative of perfect competition, while unique products pertain more to monopolistic competition. Perfectly elastic demand is a concept associated with perfect competition, where firms are price takers due to the vast number of competitors. Understanding these distinctions helps to appreciate the unique dynamics of oligopolistic markets.