Chess pieces with company logos converge on a chessboard, symbolizing oligopoly power.

Oligopoly's Hidden Game: Can Market Rivals Really Act Like a Monopoly?

Soraya Malik in Business & Economy June 2025 • 4 min read.

"Uncover the surprising conditions when a few powerful companies behave as one—and what it means for competition and consumers."

In today's economy, a few powerful firms often control entire industries, from tech giants to major energy producers. This market structure, known as an oligopoly, raises a critical question: can these rivals act in concert, effectively behaving like a single, all-powerful monopoly? Understanding this dynamic is essential, as it impacts everything from prices and innovation to consumer choice.

For decades, economists have grappled with this complex issue, trying to determine the precise conditions under which an oligopoly can successfully coordinate its actions. The idea of a "fictitious" monopoly—a scenario where individual companies, driven by their own self-interest, collectively optimize as if they were a single entity—has become a central concept in these discussions.

Now, new research sheds light on this intricate balancing act. By exploring the dynamics of continuous-time Markov games, economists are uncovering the hidden rules that govern whether oligopolies truly maximize joint profits or succumb to the pressures of competition. This article will help unpack these findings, revealing what they mean for businesses, policymakers, and consumers alike.

Decoding the "Fictitious" Monopoly: What Makes Competitors Act as One?

Chess pieces with company logos converge on a chessboard, symbolizing oligopoly power.

Imagine a group of firms exploiting a shared resource like oil or natural gas. Each company wants to maximize its own profits, but their individual decisions affect the overall market and the availability of the resource. To analyze this situation, economists often turn to the concept of the "fictitious" monopoly. This theoretical construct asks: can we design a scenario where the outcome of this oligopoly is identical to that of a single company controlling the entire resource?

The key lies in understanding the incentives and strategic interactions between the firms. Do they compete fiercely, driving down prices and depleting the resource rapidly? Or do they find ways to cooperate, either explicitly or tacitly, to maximize their collective gains? Recent research, inspired by the work of Margaret Slade, explores the necessary and sufficient conditions for this "fictitious" monopoly to arise. These conditions often depend on the specific characteristics of the market, including the number of firms, the nature of the product, and the degree of information available to each player.

Market Structure: The number and relative size of firms greatly impacts the likelihood of coordinated behavior.
Product Differentiation: Standardized products make collusion easier, while unique offerings foster competition.
Information Transparency: Open access to market data can either help or hinder coordination efforts.

One critical factor is the presence of externalities. An externality occurs when the actions of one firm affect the profits of others. For example, if one company increases its production, it may drive down prices for everyone else. In some cases, these externalities can create incentives for cooperation, pushing the oligopoly towards a "fictitious" monopoly outcome. However, in other situations, externalities can exacerbate competition, making coordination more difficult.

The Future of Market Power: Staying Ahead of the Game

As markets evolve and new technologies disrupt traditional industries, understanding the dynamics of oligopolies will become even more critical. By continuing to explore the conditions under which competitors can act as one, we can better anticipate market behavior, design effective regulations, and ultimately ensure a more competitive and consumer-friendly economy. Whether you're a business leader, policymaker, or simply an engaged citizen, staying informed about these trends is essential for navigating the complexities of the modern marketplace.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2407.2081,

Title: What Does A Dynamic Oligopoly Maximize? The Continuous Time Markov Case

Subject: econ.th math.oc

Authors: Juan Pablo Rincón-Zapatero

Published: 30-07-2024

Everything You Need To Know

What is an oligopoly, and why is it important to understand its behavior?

An **oligopoly** is a market structure where a few powerful firms control the entire industry, from technology to energy. Understanding their behavior is critical because it impacts prices, innovation, and consumer choice. It helps anticipate market behavior, design effective regulations, and ensure a more competitive and consumer-friendly economy.

How does the concept of a "fictitious" monopoly help us understand oligopolies?

The concept of a "fictitious" monopoly is a theoretical construct that helps analyze whether an oligopoly can behave like a single, all-powerful monopoly. It examines if the oligopoly can collectively optimize as if they were a single entity. It focuses on the incentives and strategic interactions between firms. This helps determine the precise conditions under which an oligopoly can successfully coordinate its actions, maximizing their collective gains. The analysis considers factors such as the number of firms, the nature of the product, and the degree of information available to each player.

What market characteristics influence whether an oligopoly mimics a monopoly?

Several market characteristics influence whether an oligopoly mimics a monopoly. These include **market structure**, specifically the number and relative size of firms, which greatly impacts the likelihood of coordinated behavior. **Product differentiation** also plays a role, with standardized products making collusion easier and unique offerings fostering competition. Furthermore, **information transparency** is critical, as open access to market data can either help or hinder coordination efforts. These factors, along with the presence of externalities, determine if firms compete or cooperate to maximize profits.

What are externalities, and how do they affect the coordination of oligopolies towards a "fictitious" monopoly outcome?

Externalities occur when the actions of one firm affect the profits of others within an oligopoly. For example, if one company increases its production, it may drive down prices for everyone else. These externalities can create incentives for cooperation, potentially pushing the oligopoly towards a "fictitious" monopoly outcome, as firms might find it beneficial to coordinate their actions to mitigate the negative effects of these externalities and maximize their collective gains. However, in other situations, externalities can exacerbate competition, making coordination more difficult as firms may prioritize their own profits, leading to price wars or other competitive behaviors.

How can understanding oligopolies and their behavior benefit businesses, policymakers, and consumers?

Understanding oligopolies can benefit various stakeholders. For **businesses**, it allows anticipation of market behavior and strategic decision-making in competitive landscapes. For **policymakers**, it enables the design of effective regulations to promote competition and prevent anti-competitive practices. For **consumers**, it ensures a more competitive market, potentially leading to lower prices, greater innovation, and more choices. Staying informed about the dynamics of **oligopolies** is essential for navigating the complexities of the modern marketplace, regardless of your role.