What is an Oligopoly?

• market in which the industry is dominated by a small number of

sellers
• Derived from the Greek for few sellers.
• Since there are few participants, each oligopolist (firm) is aware of the
actions of the others
• decisions of one firm influence, and are influenced by the decisions of
other firms
• i.e., firms’ behave strategically taking into account the likely responses of the other
market participants (game theory)

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 Oligopolies - Characteristics
• Businesses that are part of an oligopoly share some common characteristics:
• They are less concentrated than in a monopoly, but more concentrated than in a
competitive system.
• There is still competition within an oligopoly, as in the case of airlines. Airlines match
competitor’s air fares when sharing the same routes. Also, automobile companies
compete in the fall as the new models come out. One will reduce financing rates and
the others will follow suit.   
• The businesses offer identical products or services.
• This creates a high amount of interdependence which encourages competition in non
price-related areas, like advertising and packaging. The tobacco companies, soft
drink companies, and airlines are examples of an imperfect oligopoly.
 Oligopolistic Industries
• Steel industry
• Aluminum
• Film
• Television
• Cell phone
• Gas
 Examples of Oligopoly

• Four music companies control 80% of the market - Universal Music Group, Sony
Music Entertainment, Warner Music Group and EMI Group
• Six major book publishers - Random House, Pearson, Hachette, HarperCollins, Simon
& Schuster and Holtzbrinck
• Four breakfast cereal manufacturers - Kellogg, General Mills, Post and Quaker
• Two major producers in the beer industry - Anheuser-Busch and MillerCoors
• Two major providers in the healthcare insurance market - Anthem and Kaiser
Permanente
 Pros and Cons of Oligopolies
Pros
• Prices in an oligopoly are usually
lower than in a monopoly
• Prices tend to remain stable
because if one company lowers
the price too much, then the
others will do the same.
• Dynamic Efficiencies are present:
Most competition by means of
research and development (or
innovation), location, packaging,
marketing, and the product
differentiation
Cons
• Output would be less than in a
competitive market and more than in a
monopoly. 
• Major barriers keep companies from
joining oligopolies.
• economies of scale
• access to technology – patents
• actions of the businesses in the oligopoly
• licenses
• develop in industries that require a large
sum of money to start. 
• Firms establish exclusive dealerships, get
lower prices from suppliers, charge lower
prices to keep new companies out.
How do we tell?
• Market concentration refers to the size and distribution of firm market shares and
the number of firms in the market.
• Economists use two measures of industry concentration:
• Four-firm Concentration Ratio
• The Herfindahl-Hirschman Index

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Four-Firm Concentration Ratio
• The four-firm concentration ratio (CR4) measures market concentration by adding
the market shares of the four largest firms in an industry.
• If CR4 > 60, then the market is likely to be oligopolistic.

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The Herfindahl-Hirschman Index
• The Herfindahl-Hirschman index (HHI) is found by summing the squares of the
market shares of all firms in an industry.
• Advantages over the CR4 measure:
• Captures changes in market shares
• Uses data on all firms
• HHI > 1800 - > Potentially Too Concentrated

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Non-competitive Oligopolies
Cartels
firms may collude to raise prices and restrict production
behave like a monopoly
formal agreement for such collusion  cartel
ACTIVE Cooperation

Dominant Firm/Price Leader

collude in an attempt to stabilize unstable markets
reduces inherent market risks for investment and product development.
does not require formal agreement
price leadership : market leader informally sets prices to which other
producers respond
Bata in the 1980s 10
Stackleberg price-leader model
PASSIVE Cooperation
Models
• Cournot Quantity Competition
• Stackelberg Quantity Competition
• Bertrand Price Competition – homogenous products
• Bertrand Price Competition – heterogenous products
Strategic Behavior
• Perfect Competition
• Only strategy is to reduce costs
• Price-taker => output decisions do not affect market price
• cross-price elasticity = -1 (perfect substitutes)
• Own-price = -∞
• Monopoly
• Price-Searcher: output decision determines price
• Cross-price = 0 (no substitutes)
• Own-price: >= |1|
• Oligopoly
• Cross-price elasticity near -1
• Own-price elasticity > |1|
• Will have to take into account actions of other similar firms when making output/pricing
decisions
• Much more strategy 12