What Is Oligopoly? Characteristics, Advantages, & Disadvantages Of Oligopoly
This is a market condition or structure where businesses or firms are interdependent. Firms influence the output and the pricing of their competitors. But no one has a monopoly over the market share under Oligopoly.
The term comes from Greek words, ‘Oligi’ and ‘Polein’. ‘Oligi’ means ‘few’ whereas ‘Polein’ means ‘to sell.’
This market condition has specific characteristics, unlike other market conditions like the monopolistic market or perfect competition.
Read this article to learn about the definition and its characteristics.
Oligopoly Definition: What Is Oligopoly?
An oligopoly is a market structure or a type of market existing inside an economy. In addition, such market has few companies or firms that sell 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 lower 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. Monopoly is impossible in an oligopolistic market because none of the firms or companies can significantly affect or influence the others’ direction.
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 –
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.
New firms have to face significant challenges to enter an oligopolistic industry. Further more, there are potential market barriers that can prevent new businesses from entering the market. It is difficult for new businesses to get their patents, licenses, etc. Also, some of the big market players have control over crucial raw materials, making it difficult for new businesses to make their way into the market.
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.
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.
Nature Of The Product
A market with oligopolies shows businesses that produce products homogeneous or differentiated.
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.
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 the real-life situation. 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.
Indeterminateness Of The Demand Curves
Under 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 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 change their pricing. Therefore, it makes the demand curves more indeterminate.
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.
Cons 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.
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.
Do you find any similar examples of industries that might be under an Oligopoly structure? Share your insight with us through the comment below.