What is the significance of the mutual interdependence among the firms in an oligopolistic market?

An oligopoly is a state of the economy in which a few large firms allocate the overall market among them. It means the market power for the firms in the market would be higher. Therefore, any single-firm action will have a significant effect on the economic and market conditions. Thus, under an oligopoly market structure, mutual interdependence is very relevant.

There are few but large and dominant firms under the oligopolistic market form. Such firms account for the bulk of the supply on the market, thereby regulating the market price and production quantity. In an oligopoly market, there is a very great amount of mutual interdependence among the firms. A specific firm's quality and price decisions are based upon the competing firms 'price and quality decisions. This feature has a major consequence that no firm can change its price and production decisions without taking into account other firms 'possible reactions

Under the oligopolistic model of the economy, prices do not shift freely due to shifts in demand. That is due to the competing firms 'counter-decisions. Consequently, oligopolistic companies are not competing with each other on market prices.