Definition & Oligopoly Competition Examples | Oligopoly Competition Characteristics
Oligopoly Competition Market
What is Oligopoly Competition Market?
Oligopoly Competition is a type of market form involving a small number of businesses that are so powerful that they can control the entire market. It is a market where there are only a few firms in the industry.
The word “Oligopoly” means a small number of producers or sellers.’ You might be asking yourself what a ‘small number of producers’ means. Well, in economics, a small number of producers is, of course, just a few. These few producers are also known as oligopolists.
The word “oligopoly” can be used to describe a marketplace consisting of very few competing firms in which the producers could influence the price and output. They have the power to control the supply of goods to the market and prices, but the competition between the firms limits them.
Oligopolies are markets with just a few sellers, where one company can impose high prices without losing much business to competing companies. An Oligopoly is a type of market form and not a separate market form because an Oligopoly can transition into one of the other market forms. Still, it usually doesn’t become a perfect competition, a monopoly, or an oligopsony.
Oligopolies are less popular than monopolies or perfect markets because they are not as stable. There are usually large fluctuations in demand for products as well as large fluctuations in price. Oligopolies can do better in a severe recession because they are less likely to go out of business, but even then, it is difficult for them to get their prices back up.
In short, competition in the Oligopoly market form causes some products to be sold and others not to be sold.
Price competition is one of the most important oligopoly factors, yet it has minimal relation to how the oligopoly works. Price competition is when firms will lower their prices or offer discounts to entice potential buyers to purchase their goods.
It’s important to know how an oligopoly works in order to understand the customer’s decision-making process. An oligopoly is a market structure where only a few sellers can influence prices, create entry barriers for competitors, and control the market supply.
Types of Oligopoly Competition
There are different types of oligopoly competition. They include;
Pure or perfect oligopolies competition
Pure or perfect oligopoly competition is a type of market structure where competitors produce very similar goods. Because there are several producers, no one producer has any influence over their respective products’ prices. This means prices and production levels stay constant without fluctuation in the long run due to the lack of competition between firms.
Pure oligopolies are one of the rarest forms of markets, and they often occur when there is not enough competition to warrant a monopoly. If the firms produce homogeneous products, then it is called pure or perfect oligopoly. Though it is rare to find a pure oligopoly situation yet, cement, steel, aluminum, and chemicals producing industries approach pure oligopoly.
In this type, firms who know each other have a secret agreement to keep prices and production at the same level.
Collusion can exist in an oligopoly when firms collude with each other to set prices and restrict output in order to guarantee a certain level of profit. This type of collusion is rare but does happen on occasion.
A collusive oligopoly is when firms in an industry get together and split all the profits that they make. It is illegal to do this in the US; however, firms still try to get around these restrictions by using codes, such as “Beaver” for collusion and “Stag” for monopoly.
Another code used by industries is, “I’ll scratch your back if you scratch mine.” One company lowered its price to another company, and the other companies lowering their price in return. Because of this, they make more profit.
In this type, firms who know each other are in an oligopoly have production set at the same level and try to maintain or increase their demand.
A duopoly is when two companies dominate the market share. One company might be in charge of sales, while the other handles production. This is also called a bilateral monopoly. There are only two firms in this type of competition, and it is very similar to a duopoly with one firm on each side of the market, which means that both have equal control over the product’s price and output decisions.
For instance, if we were to use Apple and Samsung as an example, one would handle marketing and advertising while others would take care of making phones.
Oligopoly Competition Characteristics
Oligopoly generally occurs because there is a demand for a product with only a few suppliers and because the suppliers are competing against other competitors. There must be large amounts of demand for a product before oligopolies can become an option. A company that earns a profit in an oligopoly market needs to be selling a large quantity of products to make that profit because the company has high overhead costs.
Oligopolies are easier for companies to maintain than other forms of market forms because there are so few of them. This means that they can lobby against regulation and taxation. They can also coordinate pricing strategies, which makes it difficult for new competitors to enter the market.
Oligopoly competition is the most common type of market form, but it can be difficult for companies to maintain their control. They need to be able to set prices, and they need to have mechanisms in place that prevent new businesses from entering the market in order for Oligopolies to be successful.
When a company has enough power in an oligopoly market, it can fix its product’s price at a very high level without sacrificing much business. Oligopolies have high overhead costs because the product that is being sold is a necessity, not a luxury.
Oligopolies do not need to compete on price because they are selling such large quantities of their products. They can also charge very high prices because they do not need to sell as many products as other market forms in order to reach their profit margin.
Oligopolies may have significant entry barriers, but these barriers do not need to be legal or regulatory. If a new company comes along, they may have high overhead costs, and they may find it difficult to get their product to market in time.
In some cases, Oligopolies can be powerful enough to influence their product price strongly, but these are not common in the United States. However, oligopolies can prevent new entrants from entering the market. They can also enforce a high price for their products at a low volume level that limits competition.
Oligopolies can also affect the way that markets work for consumers. There are some products that very few companies sell, but many people want to be able to purchase those products. The companies with monopolies and oligopolies can raise their products’ prices too high levels without losing so much business that they cannot exist.
Oligopolies can be very good for producing large quantities of products, but they are difficult to maintain. There are many companies out there that want to be able to have control over a market. Oligopolies can also have problems from consumer movements and regulations because they can limit the types of products that people want to buy.
Oligopolies are generally very unstable, and they are not as friendly to consumers as other market forms. They tend to be too expensive for the average person or produce products that are not very convenient for people who do not live near a company’s factory.
Oligopoly Competition Examples
There are many oligopoly examples in the world, but the most famous one is the energy market. There are a few large oil companies, but they do not have the power to raise prices. It is not profitable for them to have high overhead costs just so that they can control a small slice of the energy market.
Oligopoly competition is the most common market form, but it is still difficult for companies to maintain their profits. They need to have something that makes it worthwhile for them to invest in their business, and this usually means that they need a high market share so that they can use economies of scale. In some cases, oligopolies can have high entry barriers, but these are not very common in the United States.
Oligopolies can also prevent new entrants from entering the market through marketing and advertising. They can also coordinate pricing strategies, which makes it difficult for new competitors to enter the market.
For an oligopoly to be successful, a company needs to prevent other companies from entering the market or limiting their product from being sold. In some cases, oligopolies can have a lot of power in a market, but this is not as common in the United States.
Oligopolies are generally very unstable and tend to be inflexible. There are some industries that a few companies dominate, but these markets can change rapidly over time.
In the cosmetic industry, firms usually require a large investment for their products. For this reason, it isn’t easy to start a new firm in that market.
One of the most important industries with many firms in the steel industry. The price of steel is mainly controlled by three firms in that market. Steel. In the U.S., there are only three major steel companies: US Steel, Nippon Steel, and German Steel.
Many firms in the automobile market offer similar products. This market’s main objective is to sell as many cars as possible rather than make a huge profit for each car. The automobile market is dominated by the “Big Three” – Chrysler, Ford, and General Motors. On the other hand, Honda is considered as a leader in Small cars.
Insurance firms can charge high prices for their services due to the low risk involved. The insurance industry is also oligopolistic due to the fact that there are only a few large insurance firms and many smaller ones. The market is dominated by about 5 large firms that are present. These firms include Chubb, Liberty Mutual, and State Farm.
Because of the high risk involved in banking, banks can charge a high price for their services. Usually, banks have joined together as oligopolistic associations in order to reduce legal costs and be successful in business. This sector is oligopolistic because there are only a few large banks in each country.
Oligopoly Competition Advantages and Disadvantages
Oligopoly Competition Advantages
The Price Control Power of The Monopolists:
To monopolists, it is very convenient to set a low price for their product. For this reason, it isn’t easy to sell products below the price of a monopoly. Low-priced goods can cover costs easier and will make a profit higher than others. Monopoly benefits from the situation that there are no competing firms in most areas because of their dominance over market share in that industry.
If there are firms that compete with the monopolies, these firms are not big enough to affect the monopolist’s market price. All in all, this allows a firm to set a low price for its product that will bring large profits to it.
Price discrimination is another way for monopoly in the oligopolistic markets to make more profit. This method of selling the same product to different customers at different prices is the main reason for price discrimination. The main goal of price discrimination is to get as much profit as possible.
Oligopoly Competition Disadvantages
Inefficiencies Due to Interdependence:
Oligopolistic markets are very much interdependent with each other. One firm’s change in its production and pricing policies can affect another’s operations. Therefore, oligopolies can be inefficient because of their interdependence.
Existence of Many Firms In The Market:
The existence of many firms in the market in an oligopolistic industry can affect the market price and generate a problem that the firm’s production will be affected by the other firms’ decisions.
As the newspapers and TV programs highlight firms’ anticompetitive activity, there is a public image of oligopolies as less than reputable.
Understanding Consumers’ Taste:
It is challenging for firms in an oligopolistic market to understand consumers’ tastes and preferences because each commodity’s demand is unique. As a result, firms must spend lots of money on market research so that they can sell their goods only to those who will buy them.
Rewards are important in oligopolistic markets because firms have similar levels of profits and production. The rewards are usually given as prizes to those who can find innovative ways to earn more profit.
Effect on Consumer Prices:
Since oligopolistic firms need to be aware of their competitors’ prices, consumers’ prices will also be affected. When a firm raises its price, other firms will follow and raise their price too. This is called a price war.
There are no standard business relationships between oligopolistic firms and their suppliers, or even among suppliers themselves. Therefore, if a firm has to find new suppliers because their rivals have taken over its old suppliers, it could be challenging for the firm to do so.
Taxes and Government:
Tax is an important cost for firms in oligopolistic markets. As the demand for products in an oligopolistic market is large, so are their sales. Therefore, a high tax rate will reduce the firm’s profits. Moreover, governments can easily hinder or block oligopolistic firms’ activities because of their size. Governments are often concerned about monopolies that have too much power over markets.
Existence of Other Associations:
Oligopoly association consists of many firms who have been united together to pursue strategic objectives. Usually, these objectives are to increase profit and decrease cost or prices. This can actually hurt an individual firm because it has to do so many things and deal with lots of information that it cannot be efficient in managing its own business. The existence of oligopoly associations can also limit new firms’ entry into the market because many old firms will try their best to prevent new firms from joining their associations.
Difference Between an Oligopoly and a Monopoly
Monopolistic competition is a market structure that has few sellers and many buyers; however, the sellers are so close together that there is only 1 small difference between their products.
A monopoly is a market structure where there are only one seller and many buyers. The seller has complete control over price and output decisions. The main characteristics of the monopoly market structure are:
- There is a single seller that has complete control over price and output decisions.
- The firm has a very large market share, which could cause all other firms to go out of business because of its high profit.
Oligopolies are made up of a few large firms that dominate the industry and have significant control over prices.
A key difference between an oligopoly and a monopoly is that many different competitors exist within an oligopoly market. The number of competitors varies from industry to industry, but typically there are five to six major players in any given market.
While these firms hold some degree of power over their own pricing decisions, they do not possess as much power as monopolists because other firms can enter into the market if one firm begins charging excessively.