Group 2

Oligopoly Market

What is an Oligopolistic Market or Oligopoly?

The primary idea behind an oligopolistic market (an oligopoly) is that few companies rule over many in a particular market or industry,
offering similar goods and services. Because of a limited number of players in an oligopolistic market, competition is limited, allowing
every firm to operate successfully. The situation typically breeds regular partnerships between firms and fosters a spirit of cooperation.

An oligopoly is a term used to explain the structure of a specific market, industry, or company. A market is deemed oligopolistic or
extremely concentrated when it is shared between a few common companies. The firms comprise an oligopolistic market, making it
possible for already-existing smaller businesses to operate in the market dominated by a few.

For example, major airlines like American Airlines and United Airlines dominate the flight industry; however, smaller airlines also
operate within the space, offering special flights in the holiday niche or offering unique services as Southwest does, providing special
guest singers and entertainment on certain flights.

Breaking Down Oligopolistic Markets and Firms

When thinking about oligopolistic companies, it’s important to note that these are the firms that rule in an oligopolistic market. The
businesses are generally the trend and price setters, seeking out and forming partnerships and deals that establish prices that are higher
than the ruling companies’ marginal costs. It means that oligopoly firms set prices to maximize their own profit. Ultimately, it lends to
partnerships and collaborations that foster success for themselves and other firms, specifically smaller companies operating within the
same market or industry.

If one firm in a market lowers their prices on goods and services, attaining optimal sales growth, firms in direct competition usually
follow suit, often creating a price war. Oligopoly companies generally do not enter such price wars and instead tend to funnel more
money into research to improve their goods and services, and advertising that highlights the superiority of what they offer over other
companies with similar products.

Entering Oligopolistic Markets

Because of the structure of oligopolies, new firms typically find it difficult – if not impossible – to tunnel into oligopolistic markets that
already exist. It is primarily due to two significant factors: several well-established and successful large firms already dominate the
space, and the companies typically offer the most premium and well-known goods and services.

For new companies with similar offerings, breaking into an oligopoly is a struggle. The only firms that typically manage to do so are
those with significant funding; an oligopolistic market requires large amounts of capital to operate because the economies of
scale generally ensure that status quo rarely changes.

Oligopolies form when several dominant companies rule over a particular market or industry, making collaboration and partnerships
possible between the firms that exist within them. While an oligopolistic setup can be incredibly beneficial for companies already
existing in the marketplace, they are equally as hard to break into for new companies without substantial funds.

https://corporatefinanceinstitute.com/resources/knowledge/economics/oligopolistic-market-oligopoly/

Background
An oligopoly is very similar to a monopoly in a sense where one company dominates the market but in this case there are at least two
firms dominating the market. These firms are able to influence the price for a product in the market. A key component to an oligopoly is
interdependence between the few firms which means that each firm must take into consideration reactions of the other firms in the
market when the firm decides on a price. The products that the oligopolistic firms produce are typically very similar and are competing
for market share. These companies don't have complete control since there are more than one firm with market power.

Etymology
The word "oligopoly" comes from two Greek words: oligo, meaning "few," and polein, "sellers."

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Concentration Ratios
A Concentration Ratio is a tool used to illustrate total output produced in a certain industry by a given number of firms. Oligopolies can
be discovered using concentration ratios because it measures the total market share dictated by the certain amount of firms. When a high
concentration ratio is present in an industry, it can be identified the industry as an oligopoly.

Examples of Oligopolies
 Cell Phone Companies: AT&T, Sprint, Verizon, T-Mobile

 Laundry Detergent: Tide, Arm & Hammer, All, Cheer

Barriers To Entry
Oligopolies tend to continuously dominate the market because it can be costly or difficult for potential rivals to enter the industry. These
high start up costs can be too expensive and the company is at risk due to the uncertainty for success. Paying for high start up costs will
put a company in the negatives and can cause a company to become bankrupt.

Cournot Solution
In 1838 the first solution to oligopolistic interdependence is associated with Antoine Augustin Cournot who was a French economist as
well as a mathematician. Even though most theories only applied to two firms he always emphasized his analysis to three or more. He
resolved this problem by suggesting that firms strive to maximize their profits under the assumption that its rivals’ outputs were
constant. Each oligopoly firm will supply that remaining share to maximize profits. Cournot’s wanted to provide his awareness of the
interdependence between the oligopolists and he also made demand curves to illustrate the market's reaction.

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VzL-60G89630xLB6LlxhC2Np-9KSmKAnDCSOgkPg

The Oligopoly Market characterized by few sellers, selling the homogeneous or differentiated products. In other words, the Oligopoly
market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control
over the price of the product.

Under the Oligopoly market, a firm either produces:

 Homogeneous product: The firms producing the homogeneous products are called as Pure or Perfect Oligopoly. It is found in the
producers of industrial products such as aluminum, copper, steel, zinc, iron, etc.
 Heterogeneous Product: The firms producing the heterogeneous products are called as Imperfect or Differentiated Oligopoly. Such
type of Oligopoly is found in the producers of consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc.

TYPES OF OLIGOPOLY MARKET

 Open Vs Closed Oligopoly: This classification is made on the basis of

freedom to enter into the new industry. An open Oligopoly is the market
situation wherein firm can enter into the industry any time it wants, whereas, in
the case of a closed Oligopoly, there are certain restrictions that act as a barrier
for a new firm to enter into the industry.
 Partial Vs Full Oligopoly: This classification is done on the basis of price
leadership. The partial Oligopoly refers to the market situation, wherein one
large firm dominates the market and is looked upon as a price leader. Whereas
in full Oligopoly, the price leadership is conspicuous by its absence.
 Perfect (Pure) Vs Imperfect (Differential) Oligopoly: This classification is
made on the basis of product differentiation. The Oligopoly is perfect or pure
when the firms deal in the homogeneous products. Whereas the Oligopoly is
said to be imperfect, when the firms deal in heterogeneous products, i.e.
products that are close but are not perfect substitutes.
 Syndicated Vs Organized Oligopoly: This classification is done on the basis
of a degree of coordination found among the firms. When the firms come

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 together and sell their products with the common interest is called as a Syndicate Oligopoly. Whereas, in the case of an
Organized Oligopoly, the firms have a central association for fixing the prices, outputs, and quotas.
 Collusive Vs Non-Collusive Oligopoly: This classification is made on the basis of agreement or understanding between the
firms. In Collusive Oligopoly, instead of competing with each other, the firms come together and with the consensus of all fixes
the price and the outputs. Whereas in the case of a non-collusive Oligopoly, there is a lack of understanding among the firms
and they compete against each other to achieve their respective targets.

Thus, oligopoly market is a market structure that lies between the monopolistic competition and a pure monopoly.

FEATURES OF OLIGOPOLY MARKET

1. Few Sellers: Under the Oligopoly market, the sellers are few, and the customers are
many. Few firms dominating the market enjoys a considerable control over the price
of the product.
2. Interdependence: it is one of the most important features of an Oligopoly market,
wherein, the seller has to be cautious with respect to any action taken by the
competing firms. Since there are few sellers in the market, if any firm makes the
change in the price or promotional scheme, all other firms in the industry have to
comply with it, to remain in the competition.

Thus, every firm remains alert to the actions of others and plan their counterattack
beforehand, to escape the turmoil. Hence, there is a complete interdependence among
the sellers with respect to their price-output policies.

3. Advertising: Under Oligopoly market, every firm advertises their products on a frequent basis, with the intention to reach more and
more customers and increase their customer base.This is due to the advertising that makes the competition intense.

If any firm does a lot of advertisement while the other remained silent, then he will observe that his customers are going to that firm who
is continuously promoting its product. Thus, in order to be in the race, each firm spends lots of money on advertisement activities.

4. Competition: It is genuine that with a few players in the market, there will be an intense competition among the sellers. Any move
taken by the firm will have a considerable impact on its rivals. Thus, every seller keeps an eye over its rival and be ready with the
counterattack.
5. Entry and Exit Barriers: The firms can easily exit the industry whenever it wants, but has to face certain barriers to entering into it.
These barriers could be Government license, Patent, large firm’s economies of scale, high capital requirement, complex technology, etc.
Also, sometimes the government regulations favor the existing large firms, thereby acting as a barrier for the new entrants.
6. Lack of Uniformity: There is a lack of uniformity among the firms in terms of their size, some are big, and some are small.

Since there are less number of firms, any action taken by one firm has a considerable effect on the other. Thus, every firm must keep a
close eye on its counterpart and plan the promotional activities accordingly.

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SAMPLES OF OLIGOPOLY MARKET

Oligopolies are prevalent throughout the world and appear to be increasing ever so rapidly. Unlike a monopoly, where one corporation
dominates a certain market, an oligopoly consists of a select few companies having significant influence over an
industry. Oligopolies are noticeable in a multitude of markets. While these companies are considered competitors within the specific
market, they tend to cooperate with each other to benefit as a whole, which can lead to higher prices for consumers.

Common Industries Overshadowed By Oligopolies

 Cable Television Services

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  Entertainment (Music and Film)
 Airlines
 Mass Media
 Pharmaceuticals
 Computers & Software
 Cellular Phone Services
 Smart Phone and Computer Operating Systems
 Aluminum and Steel
 Oil and Gas
 Automobiles

Specific Current Examples of Oligopolies

1. National mass media and news outlets are a prime example of an oligopoly, with 90% of U.S. media outlets owned by six
corporations: Walt Disney (DIS), Time Warner (TWX), CBS Corporation (CBS), Viacom (VIAB), NBC Universal, and News
Corporation (NWSA).
2. Operating systems for smartphones and computers provide excellent examples of oligopolies. Apple iOS and Google Android
dominate smartphone operating systems, while computer operating systems are overshadowed by Apple and Windows.
3. Automobile manufacturing another example of an oligopoly, with the leading auto manufacturers in the United States being
Ford (F), GMC, and Chrysler.
4. While there are smaller cell phone service providers, the providers that tend to dominate the industry are Verizon (VZ), Sprint
(S), AT&T (T), and T-Mobile (TMUS).
5. The music entertainment industry is dominated by Universal Music Group, Sony, BMG, Warner and EMI Group.

COCA-COLA
As the article stipulates, the oligopoly market has many implications for both the competing firms and the consumers. One of the firms
in this market includes the Coca-Cola Company which is in the beverage industry. The beverage industry has few players making it an
oligopoly market. In addition, the beverage industry also has barrier to entry and requires a high investment and advertising. The high
operational cost in this industry prevent other companies from entering the market and the existing firms engage in product
differentiation that is not based on price. To maintain dominancy in this industry, the Coca-Cola Company engages in product
differentiation and also operates all over the world reaching a wide range of consumers. The packaging used by the company is also
better as compared to other players in the industry.

The beverage industry is characterized by entry barriers. Though it is possible for new entrants to get into the beverage industry
considering that the legalities are not strict, the threat of arrival is high. It is hard for a new firm to maneuver in the industry in the
presence of the well-established companies such as Coca-Cola and PepsiCo, which have been in the industry for a long time.

The reason behind this argument is that the industry is very competitive. Any new entrant in this industry must be financially stable and
have well-formulated strategies to help expand the market share and enhance competitiveness. This kind of situation is hard especially in
the U.S. market, which is very unpredictable due to the high number of well-informed customers. In addition, the distribution channels
set up by the existing firms, a new firms has to invest heavily in generating distribution channels.

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