What is Oligopoly?
Oligopoly is a market structure in which a few large firms dominate the market, and each firm has a significant influence over the market price and quantity of goods or services produced.
In an oligopoly, there are typically barriers to entry that prevent new firms from entering the market, which can result in limited competition and higher prices for consumers.
Oligopolies can arise in a variety of industries, including telecommunications, airlines, and media, among others. In oligopolistic markets, firms may engage in strategic behavior such as price collusion, advertising wars, or product differentiation to gain a competitive advantage.
Examples of oligopolies include major players in the tech industry, such as Google, Apple, Facebook, and Amazon, or the automotive industry, where a few large firms dominate the market.
The Characteristics of the Oligopoly Market
A few large firms: Oligopoly markets are dominated by a small number of large firms that have a significant market share.
Interdependence: Because there are only a few large firms, their actions have a significant impact on each other. Therefore, they must consider the reactions of their competitors when making decisions.
Barriers to entry: The barriers to entry are high in an oligopoly market, meaning that it is difficult for new firms to enter the market and compete with the existing firms. Barriers to entry may include high start-up costs, regulations, patents, or economies of scale.
Price rigidity: Oligopolistic firms tend to maintain stable prices over time, even if there are changes in demand or production costs. This is because they do not want to initiate a price war or provoke retaliation from their competitors.
Non-price competition: In an oligopoly, firms may compete on factors other than price, such as quality, innovation, and customer service. Firms often differentiate their products through advertising, branding, and marketing to gain a competitive advantage.
Collusion: Oligopoly firms may collude to fix prices or output levels, which can lead to higher profits for the firms but result in higher prices for consumers.