Oligopoly
Oligopoly is a market structure characterized by a small number of firms that dominate the market. This situation is distinct from a monopoly, where only one company controls the entire market, and perfect competition, where many firms are competing, each with a negligible share of the market. In an oligopoly, each firm has significant market power, and their decisions regarding prices, production, and other strategic factors can have a substantial impact on the competitive landscape.
Characteristics[edit | edit source]
The main characteristics of an oligopoly include:
- Limited Competition: There are few sellers in the market, making the actions of each firm influential on the others.
- Interdependence: Firms in an oligopoly are highly dependent on the actions of others when making strategic decisions, such as setting prices or output levels.
- Barriers to Entry: High entry barriers exist, which can be economic, technological, legal, or due to strong brand identity, preventing new competitors from easily entering the market.
- Product Differentiation: Products may be differentiated or homogeneous. In some oligopolies, firms offer products that are close but not perfect substitutes, leading to non-price competition.
Types of Oligopoly[edit | edit source]
Oligopolies can be categorized based on the nature of the product and the competition within the market:
- Homogeneous Oligopoly: Firms produce a standardized product, often seen in industries like steel or oil.
- Differentiated Oligopoly: Companies offer products that are distinct but serve a similar purpose, allowing for non-price competition. This is common in the automobile and consumer electronics industries.
Models of Oligopoly Behavior[edit | edit source]
Several models attempt to explain how firms in an oligopoly set prices and output:
- Cournot Model: Assumes firms compete on quantity, deciding how much to produce independently, with the market price adjusting based on the total output.
- Bertrand Model: Assumes firms compete on price, with each firm choosing its price independently, potentially leading to a price war.
- Kinked Demand Curve: Suggests that a firm will face a more elastic demand curve if it tries to increase its price, while a decrease in price will be matched by competitors, leading to a rigid demand curve around the current price.
Implications of Oligopoly[edit | edit source]
Oligopolies can lead to various market outcomes:
- Price Stability: Due to the interdependence of firms, prices may be more stable in an oligopoly than in more competitive markets.
- Collusion: Firms may engage in collusion, either explicitly through cartels or implicitly, to control prices and limit competition, which can lead to higher prices for consumers.
- Innovation: The competition in differentiated oligopolies can lead to innovation as firms seek to gain a competitive edge through unique products or services.
Regulation[edit | edit source]
Governments may regulate oligopolies to prevent anti-competitive behavior and protect consumers. This can include antitrust laws, price controls, and measures to increase market transparency and competition.
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Contributors: Prab R. Tumpati, MD