Oligopoly | Oligopoly in Details (Introduction ,Features ,Advantages & Disadvantages & Market structure )
Oligopoly is a market structure in which a small number of firms dominate the market and have significant control over the prices of goods and services. The term oligopoly is derived from the Greek word ‘Oligo’ which means few and ‘poly’ which means seller. Oligopoly is a that market where there are a few firms (Sellers) in the market producing either a homogeneous product or a differentiated product. For example, mobile service providers, cement company ,Steel and aluminums.
Definition of oligopoly
Oligopoly is a market structure characterized by the domination of the market by a small number of firms that have significant control over the prices and production of goods and services. In an oligopolistic market, there are high barriers to entry, and the firms are interdependent, meaning their actions and decisions can significantly impact each other and the market as a whole. Non-price competition, such as through advertising, product differentiation, and innovation, is often used by firms in an oligopolistic market to gain an advantage over their competitors.
Explanation of the market structure of oligopoly.
In an oligopolistic market structure, a small number of large firms dominate the industry and have a significant impact on the prices and production of goods and services. These firms often have high barriers to entry, such as high capital requirements or government regulations, which limit the entry of new competitors.
The firms in an oligopolistic market are interdependent, meaning their actions and decisions can significantly impact each other and the market as a whole. For example, if one firm raises its prices, it may cause other firms to follow suit in order to maintain their market share. On the other hand, if one firm lowers its prices, it may force other firms to lower their prices as well in order to remain competitive.
In an oligopolistic market, non-price competition, such as advertising, product differentiation, and innovation, is often used by firms to gain an advantage over their competitors. Firms may also engage in collusion, where they agree to limit competition and fix prices, although this is illegal in many countries.
Overall, the market structure of an oligopoly is characterized by a small number of firms with significant market power and high barriers to entry, leading to limited competition and potentially higher prices for consumers.
Characteristics\ Features of Oligopoly
The main characteristics or Features of an oligopolistic market are:
- Dominance by a small number of firms: A small number of large firms dominate the industry and have significant control over the prices and production of goods and services.
- High barriers to entry: There are high barriers to entry in an oligopolistic market, such as high capital requirements or government regulations, which limit the entry of new competitors.
- Interdependence between firms: The firms in an oligopolistic market are interdependent, meaning their actions and decisions can significantly impact each other and the market as a whole.
- Non-price competition: In an oligopolistic market, non-price competition, such as advertising, product differentiation, and innovation, is often used by firms to gain an advantage over their competitors.
- Price stability: Prices in an oligopolistic market are usually more stable compared to a highly competitive market because the few dominant firms have the ability to maintain prices and limit price wars.
- Potential for collusion: Firms in an oligopolistic market may engage in illegal collusive behavior, such as price fixing, to limit competition and increase their profits.
- Reduced innovation: The limited competition in an oligopolistic market may reduce the incentive for firms to innovate and invest in research and development.
- Advertising: Advertising is a powerful instrument in the hands of oligopolist. A firm under oligopoly can start an aggressive and attractive advertising campaign with the intention of capturing a large part of market.
- Lack of uniformity: There is a lack of uniformity among the firm in terms of their size. Some firms may be small while others may be of bigger size.
- Uncertainty: There is a considerable elements of uncertainty in this types of market due to different behavior's patterns. Rivals may join hands and co-operate or may try to fight each others.
- Indeterminateness Of The Demand Curve: Under Oligopoly, it is not possible to determine the demand curve of a firm. This is because on one hand, there is a huge interdependence among rivals. And on the other hand there is uncertainty regarding the reaction of the rivals. The rivals can react in different ways when a firm changes its price and that makes the demand curve indeterminate.
Examples of Oligopolies
An oligopoly is a market structure characterized by a few dominant firms that hold a significant market share and have the power to control the price and quality of goods or services. Here are some examples of oligopolies:
- Automobile Industry: The automobile industry is dominated by a few large firms, such as General Motors, Ford, and Toyota, which hold a significant market share and have significant power to control pricing and production.
- Telecommunications Industry: The telecommunications industry is another example of an oligopoly, with a few dominant firms such as AT&T, Verizon, and Comcast, which control a significant share of the market and have the power to influence pricing and service quality.
- Soft Drink Industry: The soft drink industry is also an oligopoly, with a few large companies such as Coca-Cola and PepsiCo, which hold significant market share and can influence pricing and distribution.
- Airlines Industry: The airlines industry is dominated by a few large carriers, such as Delta, American Airlines, and United, which control a significant share of the market and can influence pricing and service quality.
- Banking Industry: The banking industry is another example of an oligopoly, with a few large banks, such as JPMorgan Chase, Bank of America, and Wells Fargo, which hold significant market share and can influence interest rates and lending practices.
Overall, oligopolies are prevalent in various industries, and their market power can have significant effects on pricing, quality, and competition.
Advantages and disadvantages of Oligopolies
Advantages of Oligopolies:
- Economies of Scale: Oligopolistic firms can enjoy economies of scale due to their large size, which can lead to lower production costs and increased efficiency.
- Investment in Research and Development: Oligopolistic firms can invest significant resources in research and development, leading to innovations in products and services.
- Stable Prices: Oligopolies can maintain stable prices due to their significant market power and ability to coordinate with each other.
- Product Differentiation: Oligopolistic firms can differentiate their products and services, creating a competitive edge and brand loyalty among consumers.
Disadvantages of Oligopolies:
- Reduced Competition: Oligopolies can reduce competition in the market, leading to higher prices and reduced innovation.
- Collusion: Oligopolistic firms can collude with each other to set prices and output levels, which can lead to anti-competitive behavior and harm consumers.
- Barriers to Entry: Oligopolistic markets can have high barriers to entry, making it difficult for new firms to enter and compete in the market.
- Lack of Consumer Choice: Oligopolies can limit consumer choice, leading to reduced quality and variety of products and services.
- Inefficient Allocation of Resources: Oligopolies can allocate resources inefficiently, focusing on profits rather than consumer welfare or social benefits.
Overall, oligopolies have both advantages and disadvantages, and their impacts on the market and society depend on how they operate and interact with consumers and competitors. It is essential to regulate oligopolies to promote competition and protect consumer welfare while balancing the benefits of their economies of scale and innovation.
Conclusion
oligopolies are a complex market structure with both advantages and disadvantages. While they can bring benefits such as efficiency and innovation, they can also harm consumers and limit competition. Government intervention is necessary to promote competition, protect consumer welfare, and ensure a fair and level playing field for all firms. Overall, a well-regulated oligopoly market can lead to economic growth and innovation, while an unregulated oligopoly market can have negative impacts on the economy and society at large.