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.

Key characteristics
Barriers to entry
Oligopolies and monopolies frequently maintain their position of dominance in a
market might because it is too costly or difficult for potential rivals to enter the
market. These hurdles are called barriers to entry and the incumbent can erect them
deliberately, or they can exploit natural barriers that exist.

Natural entry barriers include:

Economies of large scale production.
If a market has significant economies of scale that have already been exploited by
the incumbents, new entrants are deterred.

Ownership or control of a key scarce resource

Owning scarce resources that other firms would like to use creates a considerable
barrier to entry, such as an airline controlling access to an airport.

High set-up costs

High set-up costs deter initial market entry, because they increase break-even output,
and delay the possibility of making profits.  Many of these costs are sunk costs,
which are costs that cannot be recovered when a firm leaves a market, and include
marketing and advertising costs and other fixed costs.

High R&D costs

Spending money on Research and Development (R & D) is often a signal to potential
entrants that the firm has large financial reserves. In order to compete, new entrants
will have to match, or exceed, this level of spending in order to compete in the future.
This deters entry, and is widely found in oligopolistic markets such as
pharmaceuticals and the chemical industry.

Artificial barriers include:

Predatory pricing
Predatory pricing occurs when a firm deliberately tries to push prices low enough to
force rivals out of the market.
Limit pricing
Limit pricing means the incumbent firm sets a low price, and a high output, so that
entrants cannot make a profit at that price.  This is best achieved by selling at a price
just below the average total costs (ATC) of potential entrants. This signals to
potential entrants that profits are impossible to make.

Superior knowledge
An incumbent may, over time, have built up a superior level of knowledge of the
market, its customers, and its production costs. The superior knowledge of an
incumbent can give it considerable competitive advantage over a potential entrant.

Predatory acquisition
Predatory acquisition involves taking-over a potential rival by purchasing sufficient
shares to gain a controlling interest, or by a complete buy-out. As with other
deliberate barriers, regulators, like the Competition and Markets Authority (CMA),
may prevent this because it is likely to reduce competition.

Advertising
Advertising is another sunk cost – the more that is spent by incumbent firms the
greater the deterrent to new entrants.

A strong brand
A strong brand creates loyalty, ‘locks in’ existing customers, and deters entry.

Loyalty schemes
Schemes such as Tesco’s Club Card, help oligopolists retain customer loyalty and
deter entrants who need to gain market share.

Exclusive contracts, patents and licences

These make entry difficult as they favour existing firms who have won the contracts
or own the licenses. For example, contracts between suppliers and retailers can
exclude other retailers from entering the market.

Vertical integration
Vertical integration can ‘tie up’ the supply chain and make life tough for potential
entrants, such as an electronics manufacturer like Sony having its own retail outlets
(Sony Centres). Vertical integration in the media industry is widspread,
with Netflix having purchsed the US based ABQ studios in 2018, and completing an
agreement in 2019 with the UK’s Pinewood studio group giving it access to 14 sound
stages, workshops, and office space.
Collusive oligopolies
Another key feature of oligopolistic markets is that firms may attempt to collude,
rather than compete. If colluding, participants act like a monopoly and can enjoy the
benefits of higher profits over the long term.

Types of collusion
Overt
Overt collusion occurs when there is no attempt to hide agreements, such as the
when firms form trade associations like the Association of Petrol Retailers.

Covert
Covert collusion occurs when firms try to hide the results of their collusion, usually to
avoid detection by regulators, such as when fixing prices.

Tacit
Tacit collusion (also called ‘rule-based’ collusion) arises when firms act together,
called ‘acting in concert’   but where there is no formal or even informal agreement.
For example, it may be accepted that a particular firm is the price leader in an
industry, and other firms simply follow the lead of this firm. All firms may
‘understand’ this, but no agreement or record exists to prove it. If firms do collude,
and their behaviour can be proven to result in reduced competition, they are likely to
be subject to regulation. In many cases, tacit collusion is difficult or impossible to
prove, though regulators are becoming increasingly sophisticated in developing new
methods of detection.

Interdependence
Firms operating under conditions of oligopoly are said to be interdependent , which
means they cannot act independently of each other. A firm operating in a market
with just a few competitors must take the potential reaction of its closest rivals into
account when making its own decisions. 
LABOUR

The labour market includes the supply of labour by households and the demand for
labour by firms. Wages represent the price of labour, which provide an income to
households and represent a cost to firms. In a hypothetical free market economy,
wages are determined by the unregulated interaction of demand and supply.
However, in real mixed economies, governments and trade unions can exert an
influence on wage levels.

Nominal and real nominal wages

Nominal wages are the money wages paid to labour in a given period of time. Real
wages are nominal wages, adjusted to take into account changes in the price level.
Most workers expect at least an annual increase in their money wages to reflect
price increases, and so maintain their real wages.

The demand for labour

The main factors affecting the demand for labour are:

The wage rate

The higher the wage rate, the lower the demand for labour. Hence, the demand for
labour curve slopes downwards. As in all markets, a downward sloping demand
curve can be explained by reference to the income  and substitution effects.

At higher wages, firms look to substitute capital for labour, or cheaper labour for the
relatively expensive labour. In addition, if firms carry on using the same quantity of
labour, their labour costs will rise and their income (profits) will fall. For both
reasons, demand for labour will fall as wages rise.
The demand for the products
The demand for labour is a derived  demand, which means it is ultimately based on
demand for the product that labour makes. If consumers want more of a particular
good or service, more firms will want the workers that make the product.

Productivity of labour
Productivity means output per worker, and If workers are more productive, they will
be in greater demand. Productivity is influenced by skill levels, education and
training, and the use of technology.

Profitability of firms
If firms are profitable, they can afford to employ more workers. In contrast, falling
profitability is likely to reduce the demand for labour.

Substitutes
The extent to which labour is indispensable also affects the demand. If substitutes,
such as capital machinery, become cheaper or more expensive, the demand curve
for labour will shift to the left or right. For example, if the price of new technology
falls there may be a reduction in demand for labour.

The number of ‘buyers’ of labour

The number of buyers in a market can influence total demand in a given market. A
single buyer in a market is called a monopsonist, and these are relatively common in
labour markets. For example, London Underground is the only firm in the UK to
employ underground tube drivers. In general, when a labour market is dominated by
one employer the demand for labour is less than if there are many employers. In
addition, there is a tendency for the wage rate to be lower in such markets, which is
one reason why trade unions form, and exert pressure for higher wages.

The supply of labour

The labour supply is defined as the number of workers willing and able to work,
multiplied by the hours they are willing and able to work. It is determined by:

The wage rate

The higher the wage rate, the more labour is supplied, which means the supply curve
of labour will slope upwards. A worker’s wage, along with any bonus, provides the
main pecuniary (monetary) benefit from working.

Factors other than wages will shift the supply curve to the left or right. These factors
include:

The size of the working population

The working population is the number of people of working age (16 – 60 for women
and 16 – 65 for men) who are willing and able to work. The size of the working
population is influenced by the retirement and school leaving ages, migration, and
numbers staying on at University.

Migration
Migration can have a considerable impact on the labour market. Migrants tend to be
of working age, and while the general effect is to increase the supply of labour at all
wage rates, migration especially affects supply at lower wage rates. This is because
migrants tend to come from low wage economies, with average wages often far
below the minimum wage in the UK.

People’s preferences for work

If people prefer more work, the supply of labour increases. Preferences can be
influenced by a range of factors including changes in the ‘cost’ of working, such a
subsidised childcare, and non-wage benefits (advantages) of working.

Net advantages of work

As well as the wage rate, decisions to increase or decrease labour supply are
influenced by non-monetary (non-pecuniary) advantages, such as changes
in working conditions, job security, holiday entitlement, promotion prospects,  and
other  pyschological benefits  of work.  Improvements in these benefits will shift the
labour supply curve to the right.

Work and leisure

For many, part-time work is an increasingly attractive option given the advantages of
increased leisure. Early retirement is also a factor affecting labour supply.

An individual’s decision to supply labour is greatly affected by the choice between

work and leisure. Given that time is fixed, work and leisure are substitutes for each
other.

The choice between work and leisure can be affected by a number of factors,
including:

 Age – older workers often gain more utility from leisure.

 Direct taxes – higher income tax rates may increase the utility of leisure and reduce
the labour supply.
 Dependents – having children may increase the utility of work, and increase the
labour supply.
 Non-work income – some individuals can retire from the labour market because they
have company pensions which may be received before state pensions, which are
available for men at 65 and women at 60. Non-work income can come in the form
of cash benefits, such as the Job Seeker’s Allowance, and benefits-in-kind, such as
subsidised travel cards.