Three airlines control most routes across the Pacific. Four firms dominate the global smartphone market. A handful of banks handle the majority of corporate lending. These are oligopolies: markets where a few large sellers account for most of the output. The defining feature is interdependence. Each firm knows that its pricing and output decisions will provoke a response from rivals.

That interdependence makes oligopoly the most complex market structure to analyze. Firms may compete aggressively, driving prices down. Or they may collude, explicitly or tacitly, to keep prices high. Cartels like OPEC are formal collusive arrangements. Tacit collusion, where firms simply follow each other's pricing, is harder to detect and prosecute. Game theory is the natural tool for studying these situations, because each firm's best move depends on what the others do.

Oligopolies are not always bad for consumers. Rivalry can spur innovation, as Samsung and Apple have shown in smartphones. But when firms compete on marketing rather than price, consumers may pay more without getting much extra. Antitrust authorities watch oligopolistic markets closely, blocking mergers that would reduce the number of significant players from five to four, or four to three.

Oligopoly traits

• Few large sellers
• Interdependence in decision-making
• Barriers to entry
• Potential for collusion
• Non-price competition