OLIGOPOLY

What Is an Oligopoly?

o An oligopoly is a market structure with a small number of

firms, none of which can keep the others from having
significant influence. The concentration ratio measures
the market share of the largest firms.
 EXAMPLE OF OLOGOPOLY

 The best illustration of an oligopoly is the automobile industry. An oligopoly

is a market with imperfect competition in which a few major businesses
dominate the industry as the automobiles industry dominates numerous
others by providing identical goods and services.
 Throughout history, there have been oligopolies in many different industries,
including steel manufacturing, oil, railroads, tire manufacturing, grocery
store chains, and wireless carriers. Other industries with an oligopoly
structure are airlines and pharmaceuticals.
 Characterstics of oligopoly

The three most important characteristics of oligopoly are:

 (1) an industry dominated by a small number of large
firms
 (2) firms sell either identical or differentiated products
 (3)the industry has significant barriers to entry.
 Characteristics of Oligopoly

 Few firms
Under Oligopoly, there are a few large firms although the
exact number of firms is undefined. Also, there is severe
competition since each firm produces a significant portion of
the total output.
 Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the
long run as there are barriers to entry like patents, licenses,
control over crucial raw materials, etc.
 Interdependence
Under Oligopoly, since a few firms hold a significant share in
the total output of the industry, each firm is affected by the
price and output decisions of rival firms. Therefore, there is
a lot of interdependence among firms in an oligopoly.
 Nature of the Product
Under oligopoly, the products of the firms are either
homogeneous or differentiated.
 Selling Costs
Since firms try to avoid price competition and there is a
huge interdependence among firms, selling costs are highly
important for competing against rival firms for a larger
market share.
 Non-Price Competition
Firms try to avoid price competition due to the fear of price
wars in Oligopoly and hence depend on non-price methods
like advertising, after sales services, warranties, etc.
Firms behaviour under Oligopoly

Based on the objectives of the firms, the magnitude of

barriers to entry and the nature of government regulation,
there are different possible outcomes in relation to a firm’s
behavior under Oligopoly. These are:
 Stable prices
 Price wars
 Collusion for higher prices
What Are Some Negative Effects of
an Oligopoly?
 An oligopoly is when a few companies exert significant
control over a given market. Together, these companies
may control prices by colluding with each other,
ultimately providing uncompetitive prices in the market.
Among other detrimental effects of an oligopoly include
limiting new entrants in the market and decreased
innovation. Oligopolies have been found in the oil
industry, railroad companies, wireless carriers, and big
tech.
 Understanding Oligopolies

Oligopolies in history include steel manufacturers,

oil companies, railroads, tire manufacturing,
grocery store chains, and wireless carriers. The
economic and legal concern is that an oligopoly can
block new entrants, slow innovation, and increase
prices, all of which harm consumers.