Oligopoly Defined: Meaning and Characteristics in a Market

What Is an Oligopoly?

An oligopoly refers to a market arrangement that has a limited number of companies each of which cannot stop the other from having an impact. The concentration ratio is a measure of how much market shares are held by the biggest companies.

A Monopoly is a market that has just one supplier, a duopoly includes two firms and an oligopoly comprises two or more companies. There isn’t a specific upper limit for the number of companies in an oligopoly. However, the amount of firms must be small enough to ensure that the actions of one company have a significant impact on the actions of all other firms.

KEY TAKEAWAYS

  • “Oligopoly” or “oligopoly” refers to a tiny number of producers who work in secret or tacitly in order to limit output and/or fix prices in order to get above market returns.
  • Legal, economic technological, and other factors may be a factor in the formation and the maintenance, or even destruction, of oligopolies.
  • The main problem that oligopolies have to face is the prisoner’s challenge that each member is confronted with that encourages members to be a cheater.
  • The government’s policy may discourage or encourage oligopolistic behaviour companies in mixed economies frequently require government approval for strategies to reduce competition.

Understanding Oligopolies

In the past, oligopolies have included steel producers, oil companies railroads, tire manufacturers, railroads supermarket chains and wireless carriers. The legal and economic concern is that oligopolies can hinder new competitors or slow innovation, as well as raise costs, which can affect consumers.

The oligopoly firms decide on prices, whether collectively Рin a cartel or under the leadership of a single company rather than obtaining price from market prices. Profit margins therefore are more than they would in a market that is more competitive.

Conditions That Enable Oligopolies

The requirements that allow the existence of oligopolies include the high cost of entry in capital expenditures as well as the legal right to compete (license to make use of the wireless spectrum, or even land to railroads) as well as platforms that gain the trust of greater numbers of users (such such as the social network).

The world’s technological and trade revolution has impacted a number of these situations offshore production as well as the increase of “mini-mills” have affected the steel industry, for instance. Within the Office software market, Microsoft was targeted by Google Docs which Google paid for with money from its search business.

Why Are Oligopolies Stable?

It is interesting to know what makes a group stable. The companies must see the benefits of cooperation over the cost of competition, and then agree to not compete and be able to agree on the advantages of collaboration. Sometimes, the firms have come up with innovative ways to ward off the appearance of price-fixing for example, using moon phases. Price-fixing is setting prices rather than having them determined by market forces. Another option is for companies to follow a well-known price leader. If the leader increases prices then the other firms will follow.

The Prisoner’s Dilemma

The biggest issue companies face is that every firm is enticed to cheat. If all companies within the oligopoly agree to limit supply jointly and maintain prices at a high level Each firm is able to take a significant share of profits from its competitors through breaking the agreement, thereby in order to beat the other. This competition could be waged through price, or simply by each company increasing the amount of its output and bringing it to market.

Game theorists have created models to deal with these situations which are a form in prisoner’s battle. If the costs and benefits are balanced to ensure that no company wants to leave the group, it’s called the Nash equilibrium for the oligopolies. This can be accomplished through contracts and market-based conditions or legal restrictions or strategic alliances among oligopolies that permit the punishing of cheaters.

The oligopoly firms benefit from price fixing, establishing prices together and under the guidance of a single company in the group instead of relying on the free market to make decisions.

Special Considerations

It is important to realize that both the challenge of maintaining an oligopoly as well as the issue of coordination between sellers and buyers generally on markets are both about designing the payoffs to different prisoner’s dilemmas as well as coordination games that are repeated in time. This is why several of the same factors which facilitate the growth of market economies, by making it easier for prisoners to solve their dilemmas for market participants, including the security of contract enforcement as well as cultural and social conditions that promote trust and reciprocity, and a laissez-faire economic policy can also be a way to help promote and maintain the existence of oligopolies.

The government can respond to oligopolies through laws that prohibit collusion and price fixing. However, cartels can fix prices if they are operating outside the scope or even with the approval of government. OPEC is an instance of this as the cartel is composed composed of oil-producing states that do not have any supreme authority. In mixed economies the oligopolies frequently seek out and advocate for favorable policies of the government to be under the control or direct oversight of authorities of the government.

What Are Some Negative Effects of an Oligopoly?

An oligopoly occurs when a handful of firms exert significant influence over a market. Collectively, they could influence prices through collusion against one another, ultimately creating prices that aren’t competitive in the marketplace. Other negative effects of an oligopoly is that it restricts new players on the market, and reducing innovation. The presence of oligopolies has been observed in the railroad industry, oil industries, businesses, the wireless industry and even big technology.

What Is an Example of a Current Oligopoly?

One indicator of whether an oligopoly exists can be determined by the concentration ratio which determines the amount of companies’ size in relation to their respective industries. Examples of situations that have a high concentration ratio is evident include the mass media. For instance, in the U.S., for example this sector is controlled by five firms: NBC Universal; Walt Disney; Time Warner; Viacom CBS; and News Corporation. This is despite streaming services like Netflix or Amazon Prime begin to encroach into this market. In the big tech sector, for instance two companies are the sole owners of the operating systems for smartphones: Google Android and Apple iOS.

Is the U.S. Airline Industry an Oligopoly?

Four companies control more than 2/3 of domestic travel in the U.S. as of 2021 It has been suggested that the industry of airlines is an unregulated oligopoly. The four companies that are involved are Delta Airlines, United Airlines Holdings, Southwest Airlines, and American Airlines. According to a study compiled by the White House, “reduced competition contributes to increasing fees like baggage and cancellation fees. These fees are often raised in lockstep, demonstrating a lack of meaningful competitive pressure, and are often hidden from consumers at the point of purchase.” In 1978, the Airline Deregulation Act was imposed and deprived from the Civil Aeronautics Board the ability to regulate the sector. Prior to 1978 the airline industry was operating similar to a public utility, but prices for tickets had risen by for 20 years prior to when the deregulation became law.

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