Oligopoly is one of the non-competitive markets where the market of a particular commodity consists of more than one seller but the number of sellers is few. The special case of oligopoly where there are exactly two sellers is termed duopoly.

Under oligopoly market there are only a few firms. The output decisions of any one firm would necessarily affect the market price and therefore the amount sold by the other firms. It is, therefore, only to be expected that other firms would react to protect their profits. This reaction would be through taking fresh decisions about the quantity and price of their own output. There are various ways in which this can be theorized. 

They are as follows:

1. Firstly, duopoly firms may collude together and decide not to compete with each other and maximize total profits of the two firms together. In such a case, the two firms would behave like a single monopoly firm that has two different factories producing the commodity. 

2. Secondly, take the case of a duopoly where each of the two firms decides how much quantity to produce by maximizing its own profit assuming that the other firm would not change the quantity that it is supplying. 

3. Thirdly, some economists argue that oligopoly market structure makes the market price of the commodity rigid, i.e., the market price does not move freely in response to changes in demand. The reason for this lies in the way in which oligopoly firms react to a change in price initiated by any one firm.

If one firm feels that a price increase would generate higher profits and therefore increases the price at which it sells its output, other firms do not follow. The price increase would, therefore, lead to a huge fall in the quantity sold by the firm leading to fall in its revenue and profit. It is therefore not rational for any firm to arbitrarily increase the price.

Similarly, if a firm estimates that it could earn a larger revenue and profit by selling a larger quantity of output and therefore lowers the price at which it sells the commodity, other, firms would perceive this action as a threat and therefore follow the first firm and lower their price as well.

The increase in the total quantity sold due to the lowering of price is therefore shared by all the firms and the firm that had initially lowered the price is able to achieve only a small increase in the quantity it sells. A relatively large lowering of price by the first firm leads to a relatively small increase in the quantity sold.

Therefore, any firm finds it irrational to change the prevailing price, leading to prices that are more rigid compared to perfect competition.