June 30, 2021, | AtoZ Markets – An oligopoly is a market governed by a few companies or groups that produce standardized products. They control an area of business where others have no share and power.
In an oligopoly, there is little to zero competition. There are only a few groups of producers who have power over the market. Since the number of companies is very minimal, they often allow partnerships. In an oligopolistic firm, seeking partnership is very common to set prices more immense than the marginal cost to get a high profit. Marginal cost is the change of amount in every one additional product unit.
An oligopolistic firm has established products distributed systematically. These firms invested a lot of money to ensure that the industry’s status quo stays the same. In short, if a new firm wants to be one of the oligopolies, it is not impossible, but it can be challenging.
Did you know?
Oligopoly came from the Greek words “oligos,” which means “small,” and “polein,” which means “to sell.” Thus, giving us today’s word oligopoly, which translates to a small number of sellers.
Characteristics of an oligopolistic firm
There are distinct factors that make oligopolistic firms possess that make them different from other market structures. Let’s list down some of them:
- Interdependence. Every move of a firm affects the other.
- Group behavior. This behavior benefits all the firms.
- Advertising. It is a crucial element for a firm to stay on top of the competition.
- Competition. Each aims to be the best to gain a higher profit.
- Barriers to entry. This limits new entering firms and competition to maintain their market share.
- Uniqueness. There is a variety of sizes in the firms.
- No price competition. Usually, when a company uses a strategy where they lower their pricing, which results in sales increase, competing companies will try to match the price set. But with oligopolistic companies, their approach is spending on research, development, improving, and marketing their product rather than lowering their price tag.
- Unpredictable demand curve. The participating firms’ strategies will always affect another. No one can predict the demand curve of an oligopolistic market.
Pros and Cons
There are advantages in an oligopoly. One is price stability since there is not much competition. The next is lower pricing. If a product is expensive, consumers will naturally look for alternative firms. So, the priority between enticing customers and generating higher profit should be equal. We also have innovation. Innovations mean customer attraction and more significant market shares.
In contrast, there are also several disadvantages that oligopolies bring. One is lesser choices for the consumers since the existing oligopolies have entry barriers for a new firm. And since there is lesser competition, oligopolies tend to be inefficient in resourcing and productivity.
An example of a global oligopoly is the music streaming industry, where Spotify, Apple Music, and Amazon Music dominate. An example of an oligopoly in America is the video streaming industry, where Netflix, Hulu, Amazon Prime videos are popular. Another is the airline industry, where the leading players are American Airlines, Delta Airlines, Southwest Airlines, and United Airlines, which fly 70% of domestic flights.