Oligopoly - Explained
What is an Oligopoly?
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What is an Oligopoly?
Oligo means a small number. A market ruled by a small number of firms that can exert great influence on prices, policies, and procedures, is called an Oligopoly. This market dominance can be achieved by large firms merging together to destroy competition, single firms monopolising the market and keeping other players at bay via policy manipulation, or the absence of competition in a sphere leading to two or a few firms capturing the entire market share. Monopoly is market dominance by a single firm, like Baidu in the Chinese speaking world and Yandex in Russia. Duopoly is the market dominance by two firms, like Pepsi and Coke in the world of soft drinks and snacks. Oligopoly is two or more firms capturing the entire market. Examples of Oligopolies are: Google, Facebook Search, and Bing dominate the world of online Search in the English speaking world. Facebook, Twitter, and Reddit form an Oligopoly of social media forums online. Competition from Instagram and WhatsApp was thwarted by acquisition and merger with Facebook, creating a larger firm with multiple social communication platforms.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How does an Oligopoly Form?
Historically, most industries have seen a few firms capture the market share. From car manufacturing, to diamonds production, oil companies to grocery stores, it exists in myriad forms in diverse verticals. Oligopolies are not good for the consumers, the markets, or economic growth. They kill competition, are beyond price regulations in most cases, can enforce legal and policy changes to favour their practices, are anathema to innovation and entrepreneurship, and immune to market forces, capable of regulating supply and demand to suit their own ends. Ultimately, its the consumer who pays the price.
Stability of Oligopolies
Although detrimental to economic growth in the long run, Oligopolies tend to be stable owing to the fixed price approach they employ to stay in power. Instead of indulging in price wars with their closest competitors, they mutually agree to fix prices that benefit both firms in the long run - OPEC being a prime example of this approach. This makes them immune to governmental regulations against price fixing. They have the legal and monetary means and reach to side-step regulatory guidelines like using phases of the moon, or following the price fixing patterns of a recognised leader. Market share capturing is achieved by brand management, increased production levels, and marketing efforts in lieu of expensive price wars.
What Conditions Enable Oligopolies
Market conditions that are conducive to the sustained dominance of Oligopolies are:
- High Entry Costs that keep competition from entering the markets.
- Legal Privilege like acquiring licenses, invitations to bid on purchasing critical resources like land for railroad construction, broadband spectrums for carriers, etc.
- Reach and penetration that require breaking into the existing customer base of a reigning Oligarch like a new social media platform.
The rise of technology, global trade and alliances, and offshore production has challenged the existing norms that keep Oligarchies in power. Microsofts monopoly on the Office Suite was challenged by Google and other small time developers by raising funds via crowdsourcing and marketing via social media and other online forums. This isn't always a feasible approach as some Oligarchs, like OPEC, can hit back and strong-arm coalitions even with access to funds and legal power. Economists and Game Theorists have studied the phenomenon for long and posited theories and experiments to counter their emergence. Empirical models striking at the Nash equilibrium of Oligopolies are being developed and tested to curb their influence.
- Market Structure
- Perfect Competition
- Bidding War
- Complements & Substitutes
- Substitution Effect
- Imperfect Competition
- Market Power
- Price Takers
- Price Makers
- Perfect Competition and Decision Making
- Captive Market
- Contestable Market Theory
- Highest Profit Point in a Perfectly Competitive Market
- Marginal Revenue
- Using Marginal Revenue and Marginal Costs to Maximize Profit
- Marginal Revenue Curve
- Profit Margin and Average Total Cost
- Break Even Point - Cost Curve
- Shutdown Point - Cost Curve
- Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
- Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
- Long-Run Average Supply (LRAS)
- Decisions to Enter or Exit a Market in the Long Run
- Long-Run Equilibrium in a Perfectly Competitive Market
- Constant, Increasing, and Decreasing Cost Industries
- Productive and Allocative Efficiency in Perfectly Competitive Markets
- Market Efficiency
- Market Inefficiency
- Pareto Efficiency
- Market Failure
- Search Theory
- Natural Monopoly
- Legal Monopoly
- Bilateral Monopoly
- Promoting Innovation through Intellectual Property
- Predatory Pricing
- How Monopolists Set Price with the Demand Curve
- Total Cost and Total Revenue for a Monopolist
- Marginal Revenue and Marginal Cost for a Monopolist
- Inefficiency of Monopoly
- Perfectly Competitive Market
- Monopolistic Competition
- Differentiated Products
- Perceived Demand for a Monopolistic Competitor
- Monopolistic Competitors Choose Price and Quantity
- Monopolistic Competitors and Entry
- Monopolistic Competition and Efficiency
- Cartel (Economics)
- Game Theory
- Traveler's Dilemma
- Prisoner's Dilemma
- Iterated Prisoner's Dilemma
- Nash Equilibrium
- Diner's Dilemma
- Trembling Hand Perfect Equilibrium
- Gambler's Fallacy
- Arrows Impossibility Theorem
- Backward Induction
- Tournament Theory
- Oligopoly and the Prisoner’s Dilemma
- Forcing Cooperation in a Prisoner’s Dilemma
- Cooperation and the Kinked Demand Curve
- Corporate Merger or Acquisition
- Antitrust Laws
- Herfindahl-Hirschman Index
- Concentration Ratio
- Other Approaches to Measuring Monopoly Power in an Industry
- Restrictive Practices under Antitrust Law
- Natural Monopoly
- Cost-Plus Regulation
- Price Cap Regulation
- Regulatory Capture