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Oligopoly is a market structure in which a few companies control the market. In the presence of an oligopoly, producers can indirectly or directly limit output or prices in order to obtain higher returns.
Oligopoly is a market structure in which a few companies control the market. In the presence of an oligopoly, producers can indirectly or directly limit output or prices in order to obtain higher returns. A key characteristic of an oligopoly is that no one company can prevent other companies from having a significant impact on the market. Oligopoly differs from monopoly, in which one company dominates the market.
Market structures come in different shapes and sizes. This term is used to describe the distinction between industries, which are composed of different companies that sell their products and services. Most market structures aim for perfect competition, a theoretical structure that does not actually exist.
These market structures consist of a few companies within the industry that control the market. Companies in an oligopoly set prices, either collectively (in a cartel) or under one company, rather than obtaining prices from the market. As a result, profit margins are higher than in more competitive markets.
Some of the barriers to entry in oligopolies (which prevent new players from entering the market) include economies of scale, regulatory barriers, access to supply and distribution channels, capital requirements, and brand loyalty.
Historically, oligopolies have included steelmakers, oil companies, railroads, tire manufacturers, grocery store chains, and wireless carriers. Economic and legal concerns are that oligopolies could deter new entrants, slow innovation and raise prices, all of which would harm consumers.
Governments sometimes respond to oligopolies by passing laws against price fixing and collusion. However, if a cartel operates beyond the reach of the government or with the blessing of the government, price manipulation can occur. Oligopolies existing in mixed economies often seek and lobby for favorable government policies in order to operate under the regulation or even direct supervision of government agencies.
The main problem faced by companies in an oligopoly is that each company has an incentive to cheat. If all the companies in an oligopoly agree to work together to limit supply and keep prices high, each company has the potential to gain significant business from the others by breaking the agreement and undercutting the others. This competition can occur through price, or simply through individual companies expanding the volumes they bring to market.
IMPORTANT NOTE: Companies in an oligopoly benefit from price fixing, setting prices collectively, or setting prices at the direction of one of the companies, rather than relying on free market forces to do so.
Oligopoly is considered stable. One of the main reasons they are stable is that participating companies need to see that the benefits of cooperation outweigh the costs of economic competition and then agree not to compete but instead agree to the benefits of cooperation.
These companies sometimes find creative ways to avoid the appearance of price manipulation, such as using moon phases. Price manipulation refers to setting prices rather than letting them be determined by free market forces. Another approach is for firms to follow a recognized price leader so that when the leader raises prices, other firms follow suit.
Conditions that enable oligopolies to exist include high entry costs in terms of capital expenditures, legal privileges (licenses to use wireless spectrum or rail land), and platforms that gain value with more customers, such as social media.
Global transformations in technology and trade have changed some of these conditions. For example, the rise of offshore production and mini-mills has impacted the steel industry. In the world of office software applications, Microsoft (MSFT) is in the crosshairs of Google Docs, which Google is funding with cash from its web search business.
Game theorists have developed models for these scenarios, which constitute a kind of prisoner's dilemma. When costs and benefits are balanced so that no firm wants to leave the group, it is considered a Nash equilibrium state in an oligopoly. This can be achieved through contractual or market conditions, legal restrictions, or strategic relationships between members of the oligopoly that punish cheaters.
Maintaining an oligopoly and pervasively coordinating actions among buyers and sellers in the market involves shaping the payoffs of various prisoner's dilemmas and related coordination games that recur over time.
Therefore, many of the same institutional factors that facilitate the development of market economies by reducing prisoner's dilemma problems among market participants, such as secure enforcement of contracts, cultural conditions of high trust and reciprocity, and laissez-faire economic policies, may also help encourage and sustain oligopolies.
One of the main benefits of having an oligopoly is that competition is very limited. This is because there are few players in the market. Oligopoly allows participants to earn higher profits because there are few competitors.
Oligopoly has higher barriers to entry for new players. This means that entering the market can be difficult due to the high costs associated with doing business, the regulatory environment and problems in accessing supply and distribution channels.
Due to the lack of competition, there may be little incentive to innovate products and services. Due to a lack of product variety, consumers remain loyal to the products they know best.
High barriers to entry for new players
Lack of innovation
Consumers have little choice
limited competition
Higher profits for the company
Greater consumer demand
High barriers to entry for new players
Lack of innovation
Consumers have little choice
There are many examples of oligopoly in the market. But one of the prime examples of a global oligopoly is the Organization of the Petroleum Exporting Countries (OPEC). The organization was founded in Baghdad in 1960 with initially five countries but expanded to 13 oil-producing countries by 1975. [1]
One of the main reasons OPEC is considered an oligopoly is that it has no overall authority. Each member country within the group also owns a significant portion of the group's market share. These countries also have a lot of power over supply and demand issues and pricing (rather than individually). So when the group reduces supply when demand falls, prices rise. When demand rises, the opposite is true.
Oligopoly is when a small number of companies exert significant control over a specific market. These companies may collude with each other to control prices and ultimately offer uncompetitive prices in the market. Other adverse effects of oligopoly include limiting the entry of new entrants into the market and reducing innovation. Oligopolies have been found in the oil industry, railroad companies, wireless carriers, and large technology companies.
One measure that shows whether an oligopoly exists is the concentration ratio, which calculates the size of a company relative to its industry. Examples of high concentration ratios include mass media. In the United States, for example, the industry is dominated by just five companies: NBC Universal; Walt Disney; Time Warner; ViacomCBS; and News Corporationeven as streaming services like Netflix and Amazon Prime begin to encroach on the market. Meanwhile, in big tech, two companies control smartphone operating systems: Google Android and Apple iOS.
With just four companies controlling nearly two-thirds of domestic flights in the United States as of 2021, the airline industry is said to be an oligopoly. The four companies are Delta Air Lines, United Airlines Holdings, Southwest Airlines and American Airlines. According to a report compiled by the White House, "Reduced competition leads to increased fees such as baggage and cancellation fees. These fees often rise in lockstep, indicating a lack of meaningful competitive pressure, and are often hidden from consumers at the point of purchase."[2] Interestingly, 1978 saw the enactment of the Aviation Deregulation Act, which took away the Civil Aeronautics Commission's ability to regulate the industry. [3] Prior to this, the airline industry operated much like a utility, and fare prices had fallen in the 20 years before deregulation was introduced.
There is no perfect competition in the market. But different market structures exist, including oligopoly. These types of markets are characterized by a small number of participating companies, which may collectively set prices.
[1] Organization of Petroleum Exporting Countries. "Brief History."
[2] The White House. "Fact Sheet for Executive Order on Promoting Competition in the American Economy."
[3] Congress.gov. "S.2493 - Airline Deregulation Act."
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