Oligopoly: Meaning and Characteristics in a Market

Dive into the captivating domain of oligopoly markets with our enlightening blog. Embark on a journey to understand the intricate interplay of competition and cooperation in an industry dominated by a select few. Explore how giants vie for supremacy, crafting strategies that shape prices, innovation, and consumer experience. 

Uncover the enigma of strategic alliances and the delicate balance between rivalry and collusion. Whether you’re a curious learner or a business enthusiast, join us as we unravel the mysteries of oligopoly, shedding light on its impact on economies, industries, and decision-making processes worldwide. Welcome to a world of strategic complexities!

H2: What is an Oligopoly Market?

An oligopoly is a particular kind of market structure found in an economy. A few businesses dominate the market in an oligopoly. One of an oligopoly’s main traits is that none of these businesses can prevent the other(s) from having a sizable impact on the market. 

The concentration ratio calculates the largest companies’ percentage of the market. An oligopoly can have as many firms as it wants, but the number must be so low that each firm’s decisions greatly impact the others. As a market with only one producer, a monopoly is distinct from an oligopoly. 

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It’s time to examine the features of an oligopoly now that the definition of oligopoly has been clarified:

• Fewer Companies InvolvedAlthough the precise number of enterprises is unknown, an oligopoly has a few sizable firms. Since each firm contributes a sizeable share of the total output, fierce competition exists. 
• Entry RestrictionsIn an oligopoly market, there are several entry restrictions and hassles, such as ownership over essential raw materials, licensing, patents, etc., which contribute to the super-normal profits of a company over the long haul. These obstacles restrict new businesses from entering the market. 
• Non-Price CompetitionDue to their concern over price wars in oligopolies, businesses strive to avoid price competition and instead rely on non-price strategies like marketing, after-sales services, assurances, etc. This guarantees that businesses can shape demand and increase brand recognition.
• High DependenciesIn an oligopoly, each firm is impacted by competing firms’ price and output decisions since a small number of firms control a sizable portion of the industry’s total output. As a result, in an oligopoly, the firms have a great deal of dependencies. Therefore, when deciding on its output and price levels, a firm considers the activities and responses of its rival enterprises.
• Product NatureThe firms’ products are either homogenous or differentiated in an oligopoly.
• Selling ExpensesSelling expenses are crucial for competing against competitor firms for a higher market share since firms aim to minimize price rivalry, and there is a great deal of interconnection among firms.
• Pricing Behavior Without Any Unique PatternIn an oligopoly, businesses seek to act independently and maximize profits while also collaborating with rivals to reduce uncertainty. Real-world circumstances might differ depending on people’s motivations, making it impossible to forecast how corporations would behave in terms of price. Different pricing scenarios may result from the firms’ competition with one another or their collusion with them.
• Demand Curve’s InconclusivenessContrary to other market configurations, it is hard to ascertain a firm’s demand curve in an oligopoly. This is because adversaries are extremely interdependent with one another. 

On the other hand, it’s unclear how the competitors will respond. The demand curve is uncertain because competitors may respond differently when a firm alters its price.

H2: Example of an Oligopoly

In the marketplace, oligopolies are prevalent. 

However, when it comes to global oligopoly, there’s no better example than the Organization of the Petroleum Exporting Countries (OPEC). The group was established in Baghdad in 1960 with five countries, but in 1975 it had grown to include 13 oil-producing nations.

Since it lacks a supreme authority, OPEC is frequently referred to as an oligopoly. The group’s market share belongs to each member country in equal measure. 

When it comes to concerns with price and supply and demand, these nations collectively (and not individually) have much power. Price increases, therefore, result from the group reducing its supply when demand declines. When demand increases, the opposite is accurate. 

H2: What Are Some Challenges of an Oligopoly Market?

Each firm in an oligopoly is motivated to cheat, which is the businesses’ main issue. Imagine that the oligopoly’s participating businesses agree to limit supply and maintain high prices collectively. Each company would then stand to gain significantly more business from the others by breaching the contract and undercutting them.

H2: Oligopoly Pricing Strategies: Collusion and Price Leadership

Businesses occasionally make an effort to reduce the risk associated with acting independently and making price agreements with one another. That is collusion. Either official or informal collusion occurs. 

Price leadership or cartel behavior are two examples. A cartel is an organization of separate businesses operating in the same sector that adhere to the same rules on product distribution, output, price, and profit maximization. 

The foundation of price leadership is deliberate collusion. When there is price leadership, one large or dominating company sets the product price while the other companies agree to it. 

H2: Collusive vs. Non-Collusive Oligopoly

Below is the difference between Collusive vs. Non-Collusive Oligopoly

H2: Conclusion

In the market, complete competition does not exist. However, there are other market structures, such as oligopolies. Small numbers of participating companies that collaborate to establish prices define these markets. 

Companies profit from the lack of competition while customers access higher-quality goods and services. If you want to learn more concepts like oligopoly, an online certification course in the relevant field would be a way to go. 

For instance, HeroVired’s Financial Analysis, Valuation, & Risk Management Course can help you learn more about such markets and the financial implications of doing in such markets. 

You may never know when your business will decide to enter an oligopoly market. So, why not stay relevant and updated with such knowledge with HeroVired? For those new to the financial market, check out this HeroVired blog on Financial Market: Meaning, Definition, Types, Functions today!