University of Central Florida (UCF) ECO3223 Midterm 3 Practice Exam

An oligopoly is characterized by a market structure in which a small number of large firms dominate the industry and hold significant market power. This market structure allows these firms to influence prices and control market outcomes to a considerable extent. The interdependence among the firms is a key characteristic; the actions of one firm can directly affect the others, leading to strategic behaviors such as collusion or price wars.

In an oligopoly, firms may produce either homogeneous products, where products are similar, or differentiated products, where each firm’s product has its unique characteristics. However, the main defining feature is the limited number of firms competing in the market, which contrasts with perfect competition, where many sellers exist, or monopoly, where there is only one firm. This concentration of market power allows oligopolists to set prices above marginal cost, leading to potential economic profits in the long run.

Thus, option C accurately captures the essence of what defines an oligopoly in market structure theory.