Oligopoly Defined: Meaning and Characteristics in a Market

What is an oligopoly?

Oligopoly comes from two Greek words: "Oligi," which means "few," and "Polein," which means "to sell."

Oligopoly is a kind of market structure that exists when there are only a few very big companies that control the market. These companies control a substantial portion of the market, which gives them the ability to exert considerable influence on its pricing, output, and other elements. The banking, telecommunications, and aviation services sectors are all examples of oligopolies.

In order to protect established enterprises from the competition, these markets often have substantial entry barriers for new competitors.

The few dominating enterprises in an oligopoly structure communicate with one another and decide how to best maximize earnings while minimizing competition. They may accomplish this goal by determining pricing and managing production levels, coordinating their actions via informal agreements or legal cartels, and together introducing brand-new items. The main benefit of an oligopoly for businesses is that they have more control over prices than they would if there were a lot of small companies competing with each other.

Oligopoly is one of the four different structures for a market, the other three being perfect competition, monopoly, and monopolistic competition.

Examples

Example 1: There are just a handful of major airlines that command the majority of the market share in the airline sector. Airline A has thirty percent, whereas Airline B has thirty-five percent. They make for sixty-five percent of the market overall. Because these two companies control more than fifty percent of the market, there is a strong possibility that this is an oligopoly. The ability to manage pricing for each might go anywhere from cheap to high depending on the situation. Due to the fact that they are the market's top two competitors, they may decide to increase their pricing. It is possible that businesses may coordinate their pricing and business plans in a manner that is against the law, although such activity is rare. They would need to create a strategy for co-branding or start a joint venture to achieve their goals.

Example 2: Four firms in the winemaking industry control more than 90 percent of the market shares. One firm has 30%, another one has 30%, another one has 15%, and the final firm has 15%. It's possible that the top two imitate one another's actions and the bottom two do the same. Since there are just four businesses that dominate the market, and they account for more than 90 percent of the market share, it is quite probable that there is an oligopoly in place.

Characteristics of Oligopoly

High Entry Barriers

Oligopolies often have high entry barriers which restrict new competitors from joining the sector. As a result, competition among those who are already in the market is limited.

Existing businesses are protected from potential competitors by stringent legal constraints such as exclusive license agreements, government rules, and patents. In addition, new businesses may find it difficult to enter certain markets because of the high capital expenditures involved and the absence of economies of scale. Those that are interested in entering this market may have a tough time doing so since established businesses may have access to superior technology or resources compared to prospective entrants.

Few Firms

Oligopoly refers to a market structure in which there are only a small number of dominant enterprises, the precise number of which cannot be determined. However, each company operating in this industry contributes significantly to the overall production. Every single company that participates in an oligopoly market engages in intense competition with the other companies in the market, and each of these companies attempts to gain an advantage over the others by manipulating the price and volume of their products. In addition, there are not that many businesses competing for customers in this market, which means that the actions of any one business might have an effect on the other businesses. As a result, it is essential that every company monitor the actions and activities of other companies in its industry.

Interdependent

Oligopolistic marketplaces provide a special set of difficulties for businesses functioning there. In such types of marketplaces, rival businesses are interdependent, which means that the choices made by one company might have an instantaneous effect on the earnings of other competing companies. This indicates that any unexpected change in competition has the potential to generate significant disruptions for competing businesses.

For instance, if one company launches a massive advertising campaign or designs a new model of the product that rapidly catches the market, it would undoubtedly provoke responses from other firms, who will then have to change their tactics appropriately in order to stay competitive.

Therefore, the success of businesses is heavily dependent on the performance of other companies.

No Price Competition

Oligopoly is a market structure in which only a few companies control the majority of the market share. These companies have the ability to influence the price of the product; however, they make every effort to avoid exerting this influence because it could lead to a price war, which is something that none of the companies wants to see happen. In other words, if one company attempts to decrease the price of its goods, then the other companies will also be required to decrease the price and vice versa. As a result, the company may lose its clients, which was eventually meant to raise the price. Because of this, these businesses stick to the strategy of maintaining rigid prices, and as a result, they favor non-price competition. Therefore, in order to compete with one another, the companies use a variety of strategies beyond price, such as after-sales services, promotion, and product differentiation, amongst other approaches.

Lack of Innovations

When there is just a small number of businesses competing for a substantial chunk of a market, known as an oligopoly, such companies tend to have little incentive to create new products. This is due to the fact that there is a lack of competition between them, which means that they do not need to make a significant amount of effort in order to differentiate themselves from one another. As a consequence of this, these businesses could be more likely to concentrate their efforts on improving the efficiency of their already established procedures rather than wasting resources on inventing new concepts or items.

Additionally, large firms often have substantial bargaining leverage when negotiating with suppliers or establishing pricing for their products and services because of their dominating market positions. Therefore, there is little room for smaller enterprises that may provide more creative goods or services because of the extraordinarily high hurdles to entry.

If there isn't any outside competition, big companies in an oligopoly might not feel like they have to improve their products or come up with new ones. As a result, consumers might not have access to better options.

Different Types of Oligopoly

Pure or Perfect

A perfect oligopoly, often referred to as a pure oligopoly, is a market structure in which there are only a few companies operating in the sector, and they all manufacture homogeneous products. Common examples of this market structure are the steel industry, the cement industry, and the manufacture of aluminum.In a pure oligopoly, companies are dependent on one another to establish pricing; if one company alters its price, the others will follow suit.

Note: Items are said to be homogeneous when purchasers do not see any actual or true distinctions between the products that are being sold by different companies. This means that the products are ideal substitutes for one another.

Imperfect or Differentiated Oligopoly

An imperfect oligopoly, also known as a differentiated oligopoly, is a structure of the market in which there are only a small number of businesses operating in the industry, and each of these businesses provides a product that is differentiated to some degree from the products produced by its competitors.

In this kind of market system, companies prefer to compete with one another based on factors other than price. This means that, in addition to selecting a suitable price strategy, businesses must also develop techniques for differentiating their product from the competition. Companies may use advertising and marketing efforts to get their products recognized by consumers and persuade them to buy them instead of competitors' products.

The packaging and presentation of bottled water are often considered to be among the most notable examples of product differentiation. In reality, there isn't much difference between most bottled water brands other than the number of minerals they have. Other industries that fall within this category include the automotive sector, the tobacco business, and the soft drink market.

Note: when referring to goods, the term "differentiated product" refers to those that can maintain their competitive edge despite being put against other products that are highly identical to one another.

Collusive Oligopoly

A collusive oligopoly often referred to as a cooperative oligopoly, is a structure of the market in which businesses collaborate with one another in order to set the output or price of a certain good or service. This idea is essential to the fields of economics and business because it enables companies to increase their revenues while simultaneously reducing the amount of pointless rivalry they face from one another.

Every company that is a part of a collusive oligopoly has incentives to cooperate with one another in order to achieve shared objectives rather than compete with one another for consumers. They may control prices at a given level, establish hurdles for new competitors, fix sales amounts, share markets, or even participate in acquisitions and mergers among themselves. They are able to lessen the impact of the rivalry on their earnings by collaboratively exercising control over their levels of production and pricing, which also helps to guarantee that such levels of profitability will be maintained.

Open Oligopoly and Closed Oligopoly

An open oligopoly is a state of an economic market in which a small number of businesses control an industry, but new entrants are still allowed to join in. This categorization is determined on the basis of flexibility to join the new industry. Companies operating in an open oligopoly are always working to distinguish their product or service offerings by investing in new technology and research in order to provide superior goods at prices that are competitive with those of their rivals. This competition drives innovation and reduced pricing for consumers, creating a win-win scenario for both firms and consumers.

A closed oligopoly is one in which there are some rules that make it hard for a new company to get into the market. This might involve requiring a significant initial financial investment, complying with laws imposed by the government about licensing, or engaging in strategic collaborationwith other established businesses.

Due to a lack of rivalry, closed oligopolies often charge more, produce fewer new products, and provide fewer options to consumers. However, because there are fewer competitors in these markets, organizations operating inside them may see greater efficiency benefits and customer loyalty than they would in more open ones.

Partial Oligopoly and Full Oligopoly

Oligopoly may be broken down into "Partial Oligopoly" and "Full Oligopoly," depending on whether or not there is price leadership in the industry. The phrase "partial oligopoly" refers to a scenario in the market in which an industry is controlled by one major business (the leader), and the other companies in the industry (the followers) follow the pricing policy defined by the leader of the industry.

The electric vehicle industry is currently being led by Tesla by a massive margin. Their electric vehicles are largely responsible for the demand in the market, as well as the price and direction of the market. Apple is one more significant example; this company is often regarded as the market leader in the technology sector, and the majority of other technology suppliers watch what Apple does before making choices on their own products.

A market with a complete absence of a dominant player is said to be a full oligopoly. As a result, it might be difficult to identify the factors influencing trends and pricing. Companies may lead their respective industries and then be swiftly replaced by another firm. The insurance sector is the most notable example of a full Oligopoly since the industry is not dominated by a single dominant entity.

Syndicated Oligopoly and Organized Oligopoly

This categorization is carried out on the basis of the degree of coordination that can be discovered among the companies. Syndicated Oligopoly is a business model in which many companies band together to create a monopoly and act in the best interests of all parties involved in the market. Whereas, in the case of an organized oligopoly, the companies are part of a centralized group that determines the pricing, outputs, and quotas for the industry.

Advantages and Disadvantages of Oligopolies

Oligopolies are a key market structure in the modern economy; as a result, it is essential to have a solid understanding of both the benefits and drawbacks that come along with operating within such a market structure. The advantage and disadvantages are as follows

Advantages

• Low degree of competition.
• Higher quality of goods and services because brands need to remain in the market.
• Improved customer assistance.
• Pricing stability within the market.
• Advertisements that provide more informative content.

Disadvantages

• There aren't many options for customers.
• It's hard to get into the market.
• Companies aren't interested in new ideas because there isn't much competition.

Conclusion

Oligopoly refers to a situation in which a small number of companies dominate the market. The obstacles to the entrance are somewhat difficult to overcome, although they are not as difficult as those presented by a monopoly. There is some degree of control over price, ranging from cheap to expensive. There may or may not be any distinguishing features between products. Corporations invest a significant amount of money into their marketing effort, and they pay careful attention to the marketing strategies used by competing businesses so that they may adjust their own strategies appropriately.