Oligopoly: Meaning and Characteristics in a Market

Different types of markets have a significant influence on pricing strategies, efficiency levels, industry concentration, and consumer behavior. An oligopoly is a market structure that consists of a small number of firms that have substantial influence over a certain industry or market. While the group holds a great deal of market power, no one company within the group has enough sway to undermine the others or steal market share. As a result, prices in this market are moderate because of the presence of a certain degree of competition.

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1. When one company sets a price, others will respond in fashion to keep their customers buying.
2. An oligopoly differs from a monopoly, in which one firm dominates a market.
3. This creates significant barriers to entry for those wishing to enter the marketplace.
4. Monopolies can negatively impact consumers and competition by leading to higher prices, reduced consumer choice, and potentially lower levels of innovation.
5. Understanding the importance of market structure is crucial for businesses and consumers alike.

As discussed above, in competitive markets with a large number of buyers and sellers, prices tend to be driven down due to intense competition. From monopolies to pure competition, markets play a crucial role in determining the behavior and outcomes of industries. Whether you’re a business owner or a policymaker, understanding these market structures is essential for making informed decisions. These market structures are made up of a small number of companies within an industry that controls the market. Firms in an oligopoly set prices, whether collectively—in a cartel—or under the leadership of one firm, rather than taking prices from the market.

Oligopoly: Meaning and Characteristics in a Market

This natural monopoly ensures that electricity is widely accessible and affordable for the general population. However, they try to avoid price competition for the fear of price war. Price rigidity refers to a situation in which price tends to stay fixed irrespective of changes in demand and supply conditions. Firms use other methods like advertising, better services to customers, etc. to compete with each other. When one company sets a price, others will respond in fashion to keep their customers buying.

As firms are inter-dependent, a firm cannot ignore the reaction of the rival firms. Any change in price by one firm may lead to change in prices by the competing firms. So, demand curve keeps on shifting and it is not definite, rather it is indeterminate.

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Governments sometimes respond to oligopolies with laws against price-fixing and collusion. Yet, a cartel can price fix if they operate beyond the reach or with the blessing of governments. Oligopolies that exist in mixed economies often seek out and lobby for favorable government policy to operate under the regulation or even direct supervision of government agencies. Selling costs are more important under oligopoly than under monopolistic competition. If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly. Some of these include well-known or household names in key industries or sectors.

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So the India’s a aviation sector is expanding and it needs to more infrastructural development for Economic Growth and Development. Indian Airlines are likely to order around 1500–1700 planes over the next two years. Since, February, Air India and IndiGo have ordered more than 1000 aircraft. As older aircraft retire they are replaced by the new ones and hence experts predict that airlines backed by strong promoters will order more, given the high demand potential. Currently, engine and aircraft delivery have been hit by supply chain issues. In addition, the temporary suspension of operations by Go First has cut the number of flights by 150–200 a day.

An oligopoly exists when only a few large firms control most of the market. These firms often have significant influence over pricing and decisions within the industry. Due to interdependence among these companies, actions taken by one firm can have a significant impact on others. An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence.

Each market structure, such as monopolistic competition, oligopoly, and pure monopoly, has unique characteristics and features that impact the behavior of firms and the overall industry. To understand this concept in detail, let’s take a closer look at the market system in the article below. If the firms produce differentiated products, then it is called differentiated or imperfect oligopoly. The goods produced by different firms have their own distinguishing characteristics, yet all of them are close substitutes of each other.

This creates significant barriers to entry for those wishing to enter the marketplace. There is also a great deal of overlap between the businesses that control the industry. Within the top 15 major production studios, for example, many are subsidiaries of other large media corporations—sometimes the same large media corporations as others on the list. Hollywood has long been an oligopoly, with a select few movie studios, film distribution companies, and movie theater chains to choose from. Sometimes independent companies within an industry are closely tied together, which can decrease competition between them and further cement the existence of an oligopoly. Subaru Corporation, which owns the Subaru brand, is an independent automaker.

1. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
2. Note that perfect competition is a hypothetical situation that cannot possibly exist in a market.
3. It is the only provider of rail transportation in the country, with no close substitutes or competitors.
4. The main problem that firms in an oligopoly face is that each firm has an incentive to cheat.
5. Profit margins are thus higher than they would be in a more competitive market.
6. There is also a great deal of overlap between the businesses that control the industry.
7. One of the main reasons why OPEC is considered an oligopoly is because it has no overarching authority.

As airlines increase capacity, the fares could stablize but not only in the long run. The number of the firms is so oligopoly examples in india small that an action by any one firm is likely to affect the rival firms. Each of these companies could be considered part of an oligopoly in their respective industries. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.