When a market is dominated by a small number of large companies, it is referred as an oligopoly. The exact number of companies that is needed to create oligopoly is in range between 2 and 9, but the type of oligopoly that includes two companies is referred as duopoly.

Even thought, managing company under other market situations like monopoly bring its own risks and difficulties, from the management position, oligopoly is considered the most challenging to manage and handle because the actions of the other companies directly affects the decisions that manager brings. Complexity of oligopoly is held in dependence between decision that companies bring and in which decision brought by one company directly affects the decisions brought by other companies.

Decisions that manager brings that consider prices, must be thoroughly analyzed because of the effect on other companies. It can be explained in a way that if one company lowers their prices and the other companies do not, the company that have lower the prices will have an increase in sales, on the other hand if the other companies lower the prices also the sales will not be affected.

The example in chart 1 shows the example what will happen with the sales if the competition does not and does lower the prices.

PriceChart 1

Situation 1

Quantity

Sold

Situation 2

In situation 1 if the company lowers the prices and the competition does not match the prices, the quantity of goods sold will rise and that will affect the profit in a certain period of time.

In situation 2 if the company lowers the prices and the competition matches those lower prices there will not be a change in quantity of goods sold and profit.

In oligopoly there are four different types known as Sweezy oligopoly, Cournot oligopoly, Stackelberg and Bertrand oligopoly.

The Sweezy oligopoly consists of a presumption of actions that will other companies take if one company lowers or raises the prices which will eventually have an effect on quantity of the goods distributed. Characteristics that a certain industry must have to be identified as an Sweezy oligopoly are that there are no companies in the market that are serving many consumers, the companies produce differentiated products, each company believes rivals will cut their prices in response to a price reduction but will not raise their prices in response to price increase and barriers to entry exists (Baye 318). In this kind of oligopoly competitive companies expect one company to either raise or lower the prices but they will in most cases rather follow the price reduction than price growth. There are certain flaws in Sweezy`s oligopoly and the most important is the one that this model does not indicate how the competitive companies set the starting price.