Oligopoly is a market condition or structure where businesses or firms are interdependent. Firms influence their competitors’ output and pricing. But under these market conditions, no one has a monopoly over the market share.

The term comes from Greek words, ‘Oligi’ and ‘Polein’. In this case, ‘oligi’ means ‘few’, whereas ‘Polein’ means ‘to sell.’

Basically, this market condition has specific characteristics. This is unlike other market conditions, such as the monopolistic market or perfect competition. 

Read this article to learn about the definition and its characteristics. 

What Does Oligopoly Mean?

An oligopoly is a market structure or a type of market existing within an economy. In addition, such a market has few companies selling homogeneous products. A vital characteristic of this type of market would be that each firm has a significant influence or hold on the market. 

Firms in an oligopolistic market are fewer in number. However, the market theory does not suggest any specific numbers as to how many firms should exist in such a market. But it would require a minimum number of such firms for each of them to be able to affect one another.

Do remember that an oligopolistic market differs from a market with a monopoly. A monopolistic market makes only one producer take control of the entire market. 

Influence Among Firms

One point that often gets misunderstood. In general, oligopolistic firms actually influence each other quite strongly. That influence is the entire reason economists treat oligopoly as a separate market structure.

If one firm changes its price, rivals usually react. In fact, it happens sometimes immediately. Meanwhile, if one airline cuts fares on a route, competitors try to match the reduction within days. The same pattern shows up in telecommunications, oil refining, and automobile manufacturing.

So the defining feature is not independence. It is strategic interdependence. Basically, firms are always watching each other.

When Does a Market Actually Become an Oligopoly?

Markets rarely wake up one morning and suddenly become oligopolies. The shift usually happens slowly. Quietly, even.

At first, there may be dozens of firms. Small competitors everywhere. Then consolidation begins. A few companies grow faster than the rest. They acquire smaller players. Some firms exit. Others fail to keep up with capital requirements.

Gradually, the market begins to tighten.

Three firms might control 60 percent of the supply. Maybe four firms control 75 percent. At that point, the competitive dynamics start changing. Firms begin watching each other more carefully. Pricing decisions stop being purely internal decisions.

Economists often look at market concentration ratios to identify this moment.

The turning point is not mathematical. There is no universal number. But once a few firms start dominating supply, strategic interdependence begins to show up.

• Pricing becomes cautious.
• Output decisions become strategic.
• Advertising becomes aggressive.

Competition still exists, but not in the same chaotic way.

Read more: Which Helps Enable An Oligopoly To Form Within A Market?

Characteristics of Oligopoly

Hopefully, the oligopoly definition is clear to you. Go through the several characteristics I have listed below for a much clearer understanding of the same.

1. Few companies

An oligopolistic market has many brands, firms, or companies competing against each other. However, there is no specified number as to how many firms such a market can harbor. The competition is high, with only a few large brands that influence each other. Each of the large brands produces a massive portion of the entire market output. 

2. Market Barriers

Barriers to entry in oligopoly markets usually go far beyond patents or licenses. The real obstacles tend to be structural.

Economies of scale play a big role. Large firms can produce at a lower cost per unit simply because their production volumes are massive.

There is also the issue of sunk costs. New entrants must invest heavily before producing a single unit.

The barriers typically fall into several categories.

New firms entering such markets face an uphill battle. Even if they manage to launch successfully, incumbents often respond aggressively. They do it mostly through pricing, marketing, and acquisitions.

3. A No Price Competition Approach

In an oligopolistic market, firms are usually against a price war. So, they depend on non-price ways like advertising, warranties, sales services, etc. This way, firms can ensure to build and boost their demand and brand awareness in the market. 

4. Interdependence

An oligopoly is a type of market condition where every business is interdependent. All the large companies have an impact on the total market output. So, the decision regarding the product and the pricing each business comes up with has an effect on the market. Their output decision can affect their rivals. This is why firms and businesses need to take the actions of their competitors into account when deciding their output and pricing. 

5. Nature Of The Product

A market with oligopolies shows businesses that produce homogeneous or differentiated products.  

6. Selling Price

In a market under Oligopoly, the companies tend to work as interdependent firms and gain the maximum profit. Here, the selling price of their products is very important and a deciding factor for them to gain a massive market share. 

7. Pricing Behavior Is Pretty Common

Under Oligopoly, firms usually act independently to earn the maximum amount of their profit. On the other hand, they are also cooperating with their rivals to avoid any uncertainty. 

Their behaviors and motives in the business world can influence real-life situations. This will only make the changes in predicting pricing patterns more difficult. The firms can collude or compete with different firms, giving rise to a difficult pricing situation. 

8. Indeterminateness Of The Demand Curves

Under an oligopoly, it is difficult to understand the demand of a firm or a brand in the market. There are two factors that affect and bring about this situation. On the one hand, the brands are interdependent. On the other hand, there is some uncertainty regarding how the competitors will react. The rivals can react in a completely different manner when any of the firms changes their pricing. Therefore, it makes the demand curves more indeterminate. 

How Economists Actually Model Oligopoly?

Economists have struggled with oligopoly for decades. The behavior of a few powerful firms is harder to predict than either monopoly or perfect competition.

Several theoretical models try to explain what firms might do.

1. Cournot Competition

Firms compete by deciding how much output to produce.

Each firm assumes competitors will keep their production unchanged. Not always realistic, but the model helps explain how equilibrium can emerge when firms act strategically.

2. Bertrand Competition

Here, firms compete through price instead of output.  The logic becomes brutal. If products are identical, even two firms can push prices close to marginal cost. It is almost like perfect competition. Although a strange outcome, it is still an important insight.

3. The Kinked Demand Curve

This model explains price rigidity.

Firms believe that rivals will:

• Match price cuts
• Ignore price increases

So raising prices loses customers. Meanwhile, cutting prices triggers a price war. Hence, the result is that prices stay sticky.

None of these models perfectly predicts reality. But together they help explain why oligopolies behave in complicated ways.

Real-World Examples of Oligopolistic Markets

Some industries show oligopoly characteristics very clearly. The pattern repeats across countries.

At the outset, airline markets are a common example. In many regions, only three or four carriers dominate most routes. Also, entry barriers are high, and aircraft costs are enormous. Moreover, airport slots are limited.

Another example is the automobile industry.

These industries tend to converge toward a few dominant firms. Small competitors appear occasionally. But scaling up becomes extremely difficult. Over time, the market stabilizes around a handful of players.

Read more: In the United States, Which Type Of Industry Is Often Considered Part Of An Oligopoly?

Advantages & Disadvantages Of Oligopoly

Here are the advantages and disadvantages of Oligopoly –

Advantages of Oligopoly

• Among the main benefits of Oligopoly in a market is that it involves very limited competition. The reason is that there are only a few competitors of any business competing at the highest level. Due to limited competition, there is a chance for most businesses to gain a high amount of profit. 
• This type of market shows a high customer demand because the market is filled with high-quality products. Also, firms like these do not want to miss out on their product quality because they do not want to harm their brand awareness.
• Since the competition among the firms is always consistent, the customers win by getting the best quality services. They also get better products and better pricing for the products they need. This is only possible because of the small number of competitors. 

Disadvantages of Oligopoly

• Oligopolies in a market cause emerging brands to face higher market barriers. In addition, it is difficult for new businesses to get into the market and get their market share. The regulatory environment and high business costs are the reasons for that. 
• The competition and the competitors are limited in a market under Oligopoly. This causes less invention and a lack of innovative approaches to any product or service offerings. 
• The choice of consumers is limited. Because there are only a few market competitors providing homogeneous products.

Frequently Asked Questions (FAQs)

Bottom Line

Hopefully, you have found the information you were looking for on Oligopoly. According to oligopoly definitions, some examples of industries under this market structure would be airlines, steel manufacturing businesses, automobile manufacturers, petrochemicals, etc. 

It is important to note that oligopoly sits in a strange middle ground between monopoly and perfect competition. In this case, markets are not fully competitive, yet not fully controlled either.

Do you find any similar examples of industries that might be under an Oligopoly structure? Share your insight with us through the comment below.

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