What does oligopoly mean?
The word oligopoly derives from the Greek words “oligos” which means few and “poly” which means numerous. In other terms, an oligopoly occurs when a small number of large firms have the majority of the whole market share in a specific sector or product category. Oligopoly is also referred to as "Competition among few". The limiting case of oligopoly is a duopoly where there are two firms only.
An oligopoly, sometimes known as a few big corporations, is a market structure in which a small number of extremely powerful companies dominate the industry. This indicates that these companies have many benefits over their smaller rivals, including reduced costs and a stronger negotiating position. It can be compared to a monopoly in which all competitors have been driven out of the market.
When only a few companies are controlling the market, this is known as an oligopoly. This implies that they have substantial control over prices and, thus, substantial control over the ability to generate profits. High entry barriers make it particularly challenging for newcomers to enter an industry in an oligopolistic market.
What are a few illustrations of oligopoly?
Although there are many different oligopolies, we will concentrate on two in this article: product and regional markets. Industries with a small number of producers or sellers that compete with one another for customers are known as product markets.
The key benefit for oligopolists is their capacity to charge greater rates than would be feasible for small businesses due to their easier ability to negotiate terms and conditions with suppliers than their smaller competitors. Additionally, the oligopolist will be able to establish industrial facilities in certain places.
Oligopolies are composed of a small number of significant businesses and can produce either standardized goods like steel or differentiated goods like cars. The number of businesses that can enter the market is restricted by high entry barriers, which are frequently caused by the sector's cost structure. Due to the small number of companies, a firm's market power is influenced by the actions of the other companies in the sector.
An oligopoly is a situation in which a small number of powerful, successful companies control the market through cartelization or cooperation. Compared to monopolistic competition, it is further from the ideal competition. Consumers pay higher final pricing.
Collusion: a deal made by oligopoly participants to control pricing and output levels. two types of collusion Cost-fixing is
To continue to be successful, oligopolies must engage in competition with non-monopoly rivals. Enterprises in an oligopolistic market will increase their market share and compete with other monopolistic companies in the same industry if they continue to be profitable. Companies will try to decrease expenses by lowering pay or people and increasing output at the price of firm profitability if they become unprofitable under an oligopoly. Even non-monopoly businesses may find it challenging to turn around their profitability because of the favorable conditions that allow oligopolistic firms to increase product quality while limiting price competition. In the end, an oligopoly model has fewer drawbacks than a competitive model since firms using an oligopoly model focus more on improving their products than cutting their prices.
Characteristics of Oligopoly
Market power with interdependency:
The interdependence in the decision-making of the few forms that make up the industry is the most important aspect of oligopoly. Companies in oligopolist industries must consider both the reactions of other companies in the industry as well as the market demand for their product.
Advertising for product differentiation and better selling:
Because oligopolists depend on one another, one immediate result is that different types of oligopolists must use a variety of offensive and defensive marketing strategies to increase their market share or stop it from declining. A lot of money is spent on advertising and upsell promotion to achieve this goal in various forms. As a result, in an oligopolistic market environment, advertising and selling expenses are extremely important.
Group Behavior
Uncertainty
Demand curve with uncertainty and an oligopolist
Causes for the Existence of Oligopolies
- Economies of Scale: A market may only have a few companies, which is why an oligopoly exists. For large-scale production, there are fewer companies, which lowers their average cost of production. We refer to this as economies of scale. Economies of scale may result from the division of labor, technological advancements, etc.
- Economies of Scope: When few businesses are successful in generating a multiproduct, economies of scope emerge. Marketing, distribution, and the availability of specialized labor that may be employed to produce multiple products all contribute to economies of scope.
- A large amount of fixed cost: The creation and design of a new product require significant fixed costs. However, because large-scale production lowers the average fixed cost of production, the company will be able to offer it for less money and drive out its competitors who produce on a smaller scale.
- Barriers to Entry: Due to entry restrictions, the industry may only have a few companies. The barrier may be technological, such as when a potential firm lacks the necessary expertise or access to resources as the present firm, or it may be legal restrictions imposed by the government.