Oligopoly

Oligopoly is defined as a market structure with a small number of firms, none of which can keep the
others from having significant influence. It arises when a small number of large firms have all or
most of the sales in an industry. Oligopolies may be identified using concentration ratios, which
measure the proportion of total market share controlled by a given number of firms. When there is a
high concentration ratio in an industry, economists tend to identify the industry as an oligopoly.

When there are few firms in the market, they may collude to set a price or output level for the
market in order to maximize industry profits. As a result, price will be higher than the market-
clearing price, and output is likely to be lower. At the extreme, the colluding firms may act as a
monopoly, reducing their individual output so that their collective output would equal that of a
monopolist, allowing them to earn higher profits. Several factors deter collusion. First, price-fixing is
illegal in the United States, and antitrust laws exist to prevent collusion between firms. Second,
coordination among firms is difficult, and becomes more so the greater the number of firms
involved. Third, there is a threat of defection. A firm may agree to collude and then break the
agreement, undercutting the profits of the firms still holding to the agreement. Finally, a firm may be
discouraged from collusion if it does not perceive itself to be able to effectively punish firms that
may break the agreement.

The following are the characteristics of oligopoly:

1. Few sellers.
An important feature of oligopoly is the presence of few sellers. The product here is homogenous or
heterogeneous in nature. Since the number of sellers is few, each firm commands a sizeable market
share of a product.

2. Barriers to entry.
It is difficult to enter an oligopoly industry and compete as a small start-up company. Oligopoly firms
are large and benefit from economies of scale. It takes considerable know-how and capital to
compete in this industry.

3. Interdependence.
Due to few numbers of firms in the industry, no single firm can afford to ignore the reaction of other
firms to its actions. Suppose a given firm is contemplating to bring some changes in its price and
output policies, it duly considers the counter actions of the other firms. Thus, the fortune of one firm
are decided upon by the policies of the other firms.

4. Conflicting attitude of the firm

the firms in oligopoly behave as arch rivals and like to be independent to get maximum profit. By
their actions and counteractions, they create an atmosphere of uncertainty. Against this action, at
times they behave differently by cooperating each other to eliminate uncertainty arising out of
mutual competition. By this way they join together for maximizing their profit.

Examples of oligopoly industry:

1. Motor vehicles in U.S - Collectively, all of: Ford, Chrysler, General Motors, and Toyota; have a
collective market share of close to 60 percent in the US.
2. Breakfast cereals - Combined, Kellogg’s, General Mills, Post, and Quaker own over 85 percent of
the US cereal market.
3. Music entertainment - The top 4 firms: Universal Music Group, Sony, BMG, Warner, and EMI
Group; control close to 90 percent of the US market.
4. Beer industry - Anheuser-Busch InBev, SABMiller, Heineken International, and Carlsberg Group
own over 70 percent of the global beer market.
5. Mobile phone - Apple, Samsung, and Huawei own a combined market share of over 50 percent
of the entire global market.

Source:

Inflateyourmind, Characteristics of an Oligopoly Industry. Retrieved from:

https://inflateyourmind.com/microeconomics/unit-8-microeconomics/section-3-characteristics-of-
an-oligopoly-industry/

Economicsonline, Oligopoly. Retrieved from:

https://www.economicsonline.co.uk/Business_economics/Oligopoly.html#:~:text=An%20oligopoly
%20is%20a%20market,also%20operate%20in%20the%20market.

Toppr . Oligopoly: Definition, Characteristics and Concepts. Retrieved from:

https://www.toppr.com/guides/business-economics-cs/analysis-of-market/oligopoly/

Boycewire. Oligopoly definition. Retrieved from: https://boycewire.com/oligopoly-definition/