An oligopoly is a market structure where a small number of large firms dominate the market, selling similar products. This structure lies between a monopoly, where a single company controls the entire market, and perfect competition, where many small firms compete.
Characteristics of Oligopoly
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Few Dominant Firms: Typically, an oligopoly consists of 3 to 5 large firms that hold the majority of the market share.
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Interdependence: The actions of one firm significantly impact the others. If one firm lowers its prices, the others may follow to maintain market share.
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High Barriers to Entry: New firms find it difficult to enter the market due to high capital requirements, economies of scale, and existing brand loyalty.
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Non-Price Competition: Because price wars can be destructive, firms often compete on factors other than price, including advertising, product quality, and customer service.
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Product Differentiation: Products may be identical or slightly differentiated. Even with similar products, firms strive to create perceived differences.
Examples of Oligopolies
- Automobile Industry: Major players like Toyota, Ford, and General Motors dominate.
- Telecommunications: A few companies like AT&T, Verizon, and T-Mobile control the US market.
- Airlines: In many countries, a handful of airlines dominate the industry.
Historical Context of Oligopoly
The concept of oligopoly has been discussed since the early 20th century when industries began to consolidate, reducing competition. The Sherman Antitrust Act of 1890 in the United States was one of the first attempts to regulate such market structures.
Economic Theories on Oligopoly
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Cournot Model: Developed by Antoine Augustin Cournot, this model assumes firms choose output levels simultaneously to maximize profits, leading to a certain equilibrium.
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Bertrand Model: Named after Joseph Bertrand, this model assumes firms compete by setting prices rather than quantities.
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Stackelberg Model: This model involves firms committing to production levels sequentially, where one firm’s actions influence the others.
Comparisons with Other Market Structures
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Monopoly: A single firm dominates, sets prices, and there is no competition. Examples include utility companies in certain regions.
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Perfect Competition: Many small firms compete, with no single firm able to influence the market price.
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Monopolistic Competition: Many firms compete, but each sells slightly differentiated products, such as in the restaurant industry.
Related Terms
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Monopoly: A market where one firm exclusively supplies the product or service.
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Oligopsony: A market dominated by a few large buyers rather than sellers.
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Cartel: An association of firms in an oligopoly that colludes to control prices and output.
FAQs
Q: What are the main disadvantages of an oligopoly?
A: Oligopolies can lead to higher prices, reduced output, and less innovation due to reduced competitive pressure.
Q: Can oligopolies benefit consumers in any way?
A: Yes, they can benefit consumers through economies of scale, leading to potentially lower costs and investments in product differentiation and innovation.
Q: How are oligopolies regulated?
A: Governments may impose antitrust laws, like the Sherman Antitrust Act, to prevent anti-competitive practices and promote fair competition.
References
- Cournot, A. A. (1838). Researches into the Mathematical Principles of the Theory of Wealth.
- Bertrand, J. (1883). Review of Cournot’s Theory of Wealth.
- Stackelberg, H. (1934). Market Structure and Equilibrium.
Summary
Oligopoly refers to a market structure dominated by a few large firms, characterized by interdependence, high entry barriers, and non-price competition. Understanding oligopoly helps in comprehending complex market dynamics and the balance between competition and market power.
