Competition is limited in an oligopoly primarily due to the small number of firms that dominate the market. In an oligopolistic market structure, a few large companies hold a significant market share, which leads to a unique set of dynamics compared to more competitive markets.
These firms are highly interdependent, meaning that the actions of one firm can significantly impact the others. For instance, if one company decides to lower its prices, others may feel pressured to do the same to maintain market share. This often leads to price wars, which are generally undesirable for all firms involved.
Additionally, firms in an oligopoly often engage in collusion, either explicitly or implicitly, to maintain higher prices and restrict competition. This means they may agree on production levels or pricing strategies, further reducing the incentive to compete aggressively.
Barriers to entry also play a crucial role in limiting competition within an oligopoly. High startup costs, strong brand loyalty, and control over essential resources can prevent new entrants from challenging established firms.
In summary, the limited number of firms, their interdependence, potential for collusion, and significant barriers to entry all contribute to the reduced competition in an oligopoly.