oligopolies

(noun)

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others.

Related Terms

Examples of oligopolies in the following topics:

  • Product Differentiation

    • Oligopolies can form when product differentiation causes decreased competition within an industry.
    • While some oligopoly industries make standardized products - tools, copper, and steep pipes, for example - others make differentiated products: cars, cigarettes, soda, and cell phone manufacturers.
    • For example, the soft drink industry in the US is an oligopoly dominated by the Coca-Cola Company, the Dr.
    • Some companies are able to use marketing to achieve product differentiation, encouraging the formation of oligopolies.
    • Explain the relationship between product differentiation and the existence of an oligopoly

  • Entry Barriers

    • One important source of oligopoly power are barriers to entry: obstacles that make it difficult to enter a given market.
    • One important source of oligopoly power is barriers to entry.
    • In industrialized economies, barriers to entry have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization.
    • Oligopolies have also formed in heavily-regulated markets such as wireless communications: in some areas only two or three providers are licensed to operate .
    • Explain the necessity of entry barriers for the existence of an oligopoly

  • Few Sellers

    • An oligopoly - a market dominated by a few sellers - is often able to maintain market power through increasing returns to scale.
    • The existence of oligopoly requires that a few firms are able to gain significant market power, preventing other, smaller competitors from entering the market.
    • Monopolies and oligopolies, however, often form when an industry has increasing returns to scale at relatively high output levels.
    • Therefore, the oligopoly firms have a built-in defense against new competition.
    • Explain how increasing returns to scale will cause a higher prevalence of oligopolies

  • Game Theory Applications to Oligopoly

    • Game theory provides a framework for understanding how firms behave in an oligopoly.
    • In an oligopoly, firms are interdependent; they are affected not only by their own decisions regarding how much to produce, but by the decisions of other firms in the market as well.
    • For example, game theory can explain why oligopolies have trouble maintaining collusive arrangements to generate monopoly profits.
    • While game theory is important to understanding firm behavior in oligopolies, it is generally not needed to understand competitive or monopolized markets.

  • Price Leadership

    • Price leadership is a form of tacit collusion that oligopolies may use to achieve a monopoly-like market outcome.
    • Oligopolies are defined by one firm's interdependence on other firms within the industry.
    • Unlike perfect competition and monopoly, uncertainty about how rival firms interact makes the specification of a single model of oligopoly impossible.
    • In this way, all three can receive the benefits of oligopoly .

  • Oligopoly

    • An oligopoly is a market that is characterized by the interdependence of firms.
    • The kinked demand model begins with an oligopoly that has two sellers of a homogeneous good.
    • The typical characteristics that constitute an oligopoly are:
    • Primary metals industries are examples of oligopolies with homogeneous goods.
    • Instant breakfast drink mixes are an example of an oligopoly with differentiated products.

  • Collusion and Competition

    • Firms in an oligopoly can increase their profits through collusion, but collusive arrangements are inherently unstable.
    • Oligopoly is a market structure in which there are a few firms producing a product.
    • However, collusive oligopoly is inherently unstable, because the most efficient firms will be tempted to break ranks by cutting prices in order to increase market share.

  • The Prisoner's Dilemma and Oligopoly

    • Similarly to the prisoner's dilemma scenario, cooperation is difficult to maintain in an oligopoly because cooperation is not in the best interest of the individual players.
    • Coca-Cola and Pepsi compete in an oligopoly, and thus are highly competitive against one another (as they have limited other competitive threats).

  • Organization and Ownership of the Media

    • There are also some large-scale owners in an industry that are not the causes of monopoly or oligopoly.
    • In most countries, this system of licensing makes many markets local oligopolies.

  • Credit Unions

    • Credit unions increase competition (big banks tend to be oligopolies, while credit unions are intrinsically smaller in scale, thus high in quantity)