CONCENTRATION RATIO & GAME THEORY AND OLIGOPOLY

Oligopoly

Defining and measuring oligopoly

An oligopoly is a market structure in which a few firms dominate. When a market is shared between a
few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that
many small firms may also operate in the market. Considering the market for air travel, major airlines
like British Airways (BA) and Air France often operate their routes with only a few close competitors, but
there are also many small airlines catering for the holiday maker or offering specialist services. Similarly,
while the “Big Six” energy suppliers dominate the UK market, with the combined market share of 78%
for electricity supply (according to the energy regulator, Ofcom), there are currently 54 active suppliers.

Concentration ratios

The Concentration ratio, in economics, is a ratio that indicates the size of firms in relation to their
industry as a whole. Low concentration ratio in an industry would indicate greater competition among
the firms in that industry, compared to one with a ratio nearing 100%, which would be evident in an
industry characterized by a true monopoly.

Game theory

Game theory is the study of mathematical models of strategic interactions among rational agent. It has
applications in all fields of social science, as well as in logic, systems science and computer science.
Game theory has been widely recognized as an important tool in many fields.

Examples of Oligopoly

Oligopolies are common in the airline industry, banking, brewing, soft drinks, supermarkets and music.
For example, the manufacture, distribution and publication of music products in the UK, as in the UE and
USA, is highly concentrated, with a 3-firm concentration ratio of around 70% and is usually identified as
an oligopoly.

Evaluation of Oligopolies

Oligopolies are significant because they generate a considerable share of the UK’s national income, and
they dominate many sectors of the UK economy.