A useful way to characterize different market types is by the number of firms on the supply side of the market and the number of buyers on the demand side. An oligopoly is a market having few firms (but more than one firm) on the supply side and a very large number of buyers on the demand side, each of whom makes a negligible contribution to the market demand function. A buyer will take market conditions as given, for he cannot affect them, but a seller will inevitably be preoccupied with guessing the behavior to be expected from rival sellers. Furthermore, in a market that will continue in operation for a long time, an oligopolistic firm will naturally be concerned with how its present actions may influence the behavior of its rivals in the future.

The key distinguishing feature that sets oligopoly apart from competition and from (textbook) monopoly is that oligopolists are strategically linked to one another. The best policy for one firm is dependent on the policies being followed by each rival firm in the market. Imagine, for example, a town with four home mortgage lenders in a nation with no national mortgage market. Each lender must select a mortgage interest rate and will, let us say, lend to all qualified applicants.