Market Structure:

Oligopoly
 July 11, 2018

Oligopoly
In an Oligopoly market structure, there are a few interdependent firms dominate the
market. They are likely to change their prices according to their competitors.

Characteristic of oligopoly

 Few firms
 Either homogenous or differentiated products.
 Difficult entry
 Distinguishing feature: interdependence

The main features of oligopoly:

 An industry which is dominated by a few firms.

 Interdependence of firms – companies will be affected by how other firms set price and
output.
 Barriers to entry. In an oligopoly, there must be some barriers to entry to enable firms to
gain a significant market share. These barriers to entry may include brand loyalty or
economies of scale. however, barriers to entry are less than monopoly.
 Differentiated products. In an oligopoly, firms often compete on non-price competition.
This makes advertising and quality of the product are often important.
 Oligopoly is the most common market structure

How firms compete in oligopoly

There are different possible ways that firms in oligopoly will compete and behave this will
depend upon:

 The objectives of the firms; e.g. profit maximization or sales maximization?

 The degree of contestability; i.e. barriers to entry.
 Government regulation.
There are different possible outcomes for oligopoly:
1. Stable prices (e.g. through kinked demand curve) – firms concentrate on non-price
competition.
2. Price wars (competitive oligopoly)
3. Collusion- leading to higher prices.

Collusion
Whenever a market is dominated by only a few firms, firms can benefit at the expense of
consumers by “agreeing” to restrict output or, equivalently, to charge higher prices.

Implicit collusion
Also termed as tacit collusion
 This occurs when two or more firms in the same industry informally agree to control the
market.
Prime example: price leadership
Price leadership: one firm takes the lead of setting a price that will boost profits for the
entire industry. Other firms then go along with this price, knowing that they stand to benefit by
doing so.

Explicit collusion
Also termed as overt collusion
This occurs when two or more firms in the same industry formally agree to control the
market.

Examples of oligopoly

 Cable Television Services  Cellular Phone Services

 Entertainment Industries (Music and  Smart Phone and Computer
Film) Operating Systems
 Airline Industry  Aluminum and Steel
 Mass Media  Oil and Gas
 Pharmaceuticals  Auto Industry
 Computer & Software Industry
Reference:
- https://www.intelligenteconomist.com/market-structure-oligopoly/
- https://prezi.com/16bljq86_c2g/oligopoly/
- https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-
oligopolies.asp
- https://www.economicshelp.org/microessays/markets/oligopoly/