Currently, oligopoly is very popular in many fields. In other words, it refers to one or a few companies dominating or manipulating an entire market.
The term “monopoly” was first coined by Frederic Bastiat, a French economist, to describe a situation when a few firms completely controlled a market.
The oligopoly involves a market structure where few companies or businesses dominate a market. It is achieved by companies controlling oversupply and demand curves, quality, pricing, and innovation.
It results in these companies controlling the majority of a market share and can charge high prices. The following are the critical characteristics of oligopoly.
- Profit maximization behavior
- Horizontal integration
- Limited competitors
- High barriers to entry into a market for new companies
Oligopolies are popular in many industries, like telecommunications, banking, retail, healthcare, media, energy, etc. It usually occurs due to barriers to market entry, such as government regulations or patents.
Also, oligopolies are often formed through acquisitions and mergers. The fact is that two companies or more will make a monopoly by combining resources.
It will lead to lower profits for shareholders and increased costs for consumers.
The leading cause of oligopoly is no competition between companies or producers.
It will make profitability drop over time. Then, as the competition is lacking, the number of competitors will decrease. When fewer producers enter a market, the price will increase while quality may drop because of lack of competition.
In addition, fewer competitors lead to prices tend to be fixed rather than based on the demand and supply curve.
As competitors become fewer, prices tend to stay where they’re. Plus, profit pre-merger margins will start to narrow.
Once most competitors are out of a market, the remaining manufacturers will not tend to lower prices. The reason is that they have less incentive to do so, and no one prefers to sell at low prices.
Having fewer competitors in a market can cause this market to become a concentrated market and finally become an oligopoly.
So, several manufacturers will control most of the market share and set prices.
Oligopoly involves a market dominated by a few companies. It may lead to a lack of competition or less innovation in this market.
An oligopoly will also raise prices while cutting down innovation in a market. Oil is the best example of this.
The only producer will have significant power in manipulating prices and controlling innovations in an industry.
With the lack of competition, consumers will not benefit from price reductions and discoveries or innovations that have the potential to raise living standards.
You should find ways to allow competitor entities to participate in a market.
Apple is a great example when it comes to oligopoly companies.
It benefits significantly from the smartphone area because it dominates about half the smartphone market share globally.
For example, Google has monopolized the search engine with about three-quarters of the US search engine market.
Any digital content is similar, as YouTube accounts for about 90% of the online video streaming market.
Other examples of the oligopoly are credit card processing businesses, like Visa, or cable television providers, like Comcast.
While a few oligopolies don’t significantly harm the consumer, others do. So, the government can take many actions to protect the consumer from oligopolies.
Through the imposition of severe penalties for violations of antitrust laws, the government can deter companies from excessive price manipulation.
The government can also incentivize new competitors by providing special grants, tax relief, or other financial aid.
New companies will probably pull industries closer to perfect competition, where consumers benefit from lower prices.
The government may impose price ceilings to limit how high prices in oligopolies are set.
Oligopolistic strategies or oligopoly market industries are categorized into many kinds:
- Pure oligopoly
- Imperfect oligopoly
- Open oligopoly
- Closed oligopoly
- Collusive oligopoly
- Competitive oligopoly
- Partial oligopoly
- Total oligopoly
- Organized oligopoly
- Syndicated oligopoly
- High barriers to new entry
- Maximized revenues
- The interdependence of firms
- Price-setting ability
- Non-price competition
- Product differentiation
Firms or businesses operating in the following areas are commonly considered oligopolistic in different jurisdictions:
- Airline industry
- Electrical industry
- Wireless telecommunication services
- Petroleum industry
- Automobile industry
- Smartphone industry
- Steel industry
- Railroads industry
- The tobacco industry
- News Media
Here are the six firms that makeup approximately 90 percent of the mass media market in the US: Time Warner (TWX), Walt Disney (DIS), CBS Viacom (VIAB), NBC Universal, Corporation (CBS), and News Corporation (NWSA).
- Mobile Phones
Samsung, Apple, and Huawei own a combined market share of over 50 percent worldwide.
SABMiller, Anheuser-Busch InBev, Carlsberg Group, and Heineken International own over 70% of the global beer market.
- Music Entertainment
The top 5 firms, including Sony, BMG, Universal Music Group, Warner, and EMI Group, control nearly 90% of the US market.
Hopefully, through this article, you already know “What is an Oligopoly market?” and “Which helps enable an oligopoly to form within a market?”
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