You may have heard about the term ‘Monopoly’. It is a term used to describe an industry where only one company dominates and calls the shots. But what do we call an industry where a handful of companies dominate, and each has a large market share? We call that an oligopoly.

What Is an Oligopoly?

Oligopoly is a term used to describe a situation where a few companies have a large amount of power in an industry. These few companies come together to determine the price of the market. The players in this market have an interdependence that causes them to collaborate and compete to control the market. 

In an oligopolistic market, there are a few companies that sell similar or differentiated products. There are also a few companies in the market, which leads to every company influencing the behaviour of the other companies. They, too, get influenced by the behaviours of other companies.

Examples of Oligopoly 

You can find oligopolies in industries like the technology industry, the media industry, and the automobile industry, among others. Here are a few examples of oligopolies in several industries:

Oligopoly in the Technology Industry

The best illustration of oligopoly can be found in the computer technology industry. If we check for the top computer operating systems, two noticeable names come up “Windows and Apple Inc.” These two players have most of the overall market share in the industry. 

We also have Linux playing a good game in the industry, these three companies dominate and control the market. You can find any one of the three operating systems on different computer brands.

For example, if you purchase an HP laptop, a Dell laptop, and a MacBook together, despite them being different brands, both HP and Dell use Windows. In the software operating system market, Apple, Windows, and Linux are in an oligopoly and we can also say the same for Android and IOS.

Oligopoly in the Automobile Industry

This is one of the industries that can be considered an oligopoly because it relies on brand loyalty and image to drive sales. Car lovers mostly have a particular company car they prefer, and most of the cars we see daily, from sports cars to SUVs to convertibles to sedans, are all produced and owned by the big five players in the automobile industry.

These five brands, General Motors, Chrysler, Ford Motor Company, Toyota Motor Company, and Honda Motor Company, dominate and control the automobile industry, making them an oligopoly.

Oligopoly in the Mass Media Industry

In the media, we have only had select companies dominating the market at the same time. We are going to streamline the whole media industry and focus on the streaming part of it.

Netflix, Hulu, and Amazon are the main competitors in the streaming industry and the perfect example of interdependence in an oligopoly. They all collaborate and compete in the sense that if Netflix reduces its price, then the rest must follow suit or risk losing customers. They all need to be in silent agreement about the price range of the services they offer.

Oligopolistic Competition

This is a situation where only a few players have slightly distinguished products, but every player or business involved has a high-level share of the market. An oligopolistic competition happens when, despite their high market share, they can’t afford to overlook the activities of other players in the same industry.

Characteristics of Oligopoly

Different industries can be classified into different types of markets. The markets can be differentiated or recognized through their characteristics. Here are a few characteristics that define an oligopolistic market:

Few firms in the industry: The main characteristic of an oligopoly market is the existence of only a few firms that dominate the market. There could be other smaller firms with very little impact, but an oligopoly happens when there are a select few firms that, when put together, have at least 95% of the market.

Entry barriers: Since there is fierce competition in an oligopolistic industry, there are barely any barriers to entry or exit from the industry. In the long term, however, several types of barriers to entry tend to prevent new firms, like a lack of exclusive rights or high capital requirements, which discourage new players. 

Price rigidity: In an oligopoly, all firms try to stick to a particular price range to discourage price rivalry. Engaging in a price war usually benefits none of the companies involved, except maybe the consumers.For instance, should Netflix decide to reduce their subscription price due to losing customers, there’s a high chance the rest of the streaming companies will follow suit, which will lead to them all recording a loss. 

Interdependence: In an oligopoly, because a few companies and firms account for a large market share of the industry, each firm is influenced by the price and production decisions of its rivals.

Therefore, there is great interdependence between companies in an oligopoly. Thus, a company considers the actions and reactions of competing firms while determining its prices and production levels. 

Advertising: Advertising is a powerful tool in oligopoly. Companies use advertising to capture a large portion of the market. It’s easier to increase your share of the market if your competitors are a few firms.

An example of advertising in an oligopoly is Pepsi and Coca-Cola trying to one-up each other with each advertising campaign they do.

Oligopoly vs Monopolistic Competition 

With monopolistic competition, many companies are competing with each other to sell similar products, but the products are not close substitutes. However, with an oligopoly, there are a few large firms that make all or most of an industry’s sales. 

The bottom line is that monopolistic competition occurs when different companies offer similar products or services that are not exact substitutes. Hair and clothing salons are examples of monopolistic industries.

Oligopoly Graph

Kinked demand curves are the main characteristic of oligopolistic markets. It shows how the elasticity of demand changes at higher and lower prices. As a result, prices remain rigid.

As we can see from the chart above, companies don’t seem to have any incentive to raise or lower prices.

This is because any increase in prices will have a huge impact on demand. Companies competing will most likely keep their prices stable, so the company that increases prices will lose customers to cheaper competitors.

At the same time, reducing prices will not increase demand. This is because a price decrease will lead to a response from competitors; the others will likely follow suit, and at the end of the day, no real gains in demand will be made.

Key Takeaways

• Oligopoly happens when a market has a handful of players that dominate the whole market.
• Players in an oligopolistic industry are highly dependent on each other and closely watch and monitor each other.
• In an oligopoly, collaboration and competition are happening at the same time.
• The government can cause or stop an oligopoly through policies and exclusive licenses.

FAQ

Q. What is an oligopoly?

Ans: Oligopoly is when a handful of companies have a significantly large market share in an industry.

Q. What is an example of an oligopoly?

Ans: An example of an oligopoly is the smartphone industry. The industry is currently ruled and dominated by Apple, Samsung, Lenovo, and Huawei. They hold most of the market share in the smartphone industry, with Samsung leading the race.

Q. What are some characteristics of oligopoly?

Ans: Several characteristics inform the type of market structure an industry operates on. They are entry barriers, price rigidity, interdependence on each other, and a few players in the industry. Once you see an industry that has at least three of these characteristics, it’s safe to say it’s an oligopoly. 

Q. What are the conditions of an oligopoly?

Ans: Two major conditions that cause an oligopoly are high initial capital or exclusive licenses and patents handed to a select few.