Oligopoly

Oligopoly

It is probably fair to say that this market structure is the most realistic of the four we have encountered. There are certainly more examples of this structure in the real world. As there are many different theories as to how firms behave in Oligopoly, we will not have a section looking at specific assumptions. Instead we shall look at the characteristics of oligopolistic industries.

  1. Numbers: In oligopoly, there are relatively few firms in the industry. Although there could be quite a few firms, the concentration ratio tends to be fairly high. This means that, for example, the largest five firms in the industry accounts for 80% of the market share. The implication of this is that firms in oligopoly are interdependent. The actions of one firm will directly affect the others. Each of the large firms in the industry has to try and predict the actions of the others. They may collude to avoid this unpredictability (see later).
  2. Ease of entry: This one is about barriers to entry. A bit like monopoly. It is assumed that barriers to entry are fairly substantial. It should be noted, though, that there are examples of oligopoly where there are very few barriers to entry. This will be covered in the last sub-section of this Learn-It called 'Contestable markets'.
  3. Knowledge: Knowledge is by no means perfect, as in the perfectly competitive market, but firms sometimes collude so that they can act as one and eliminate some of the uncertainty that exists when one is trying to work out what one's competitors are going to do.
  4. Product: Each firm will be producing a branded product. There will be definite differences in the products on offer. Many economists believe that the main form of competition in oligopoly is non-price competition, and advertising in particular, to highlight the differences in the products.
  5. Maximising assumption: Although it is assumed that firms aim to maximise their profits in the kinked demand curve model of oligopoly (see later), it is quite possible that the managers of these firms may have other managerial objectives, associated with power of sales maximisation (if their salaries are based on sales).

In a word, yes, quite a few, actually. The one that most textbooks like to discuss is the market for petrol, particularly in terms of retailing, but also its extraction. How many firms can you think of that sell petrol?

Another popular example is banking. This was a very good example when virtually everyone banked with Midland (now HSBC), Nat-West, Barclays and Lloyds, but with the advent of building societies and Internet banking, this has become a more competitive industry and, perhaps, a less oligopolistic one.

Banking

Some economists argue that the food retailing market has moved away from the monopolistically competitive market structure towards oligopoly. The 'big four' (Tesco, Sainsbury's, Asda and Safeway) now control well over half the market.

There are numerous different detergents to choose from at your local supermarket (powder and liquid). What you may not have been aware of is the fact that either Unilever or Procter and Gamble supply them all. This is an example of a duopoly (only two firms in the industry) rather than oligopoly.

The Coca-Cola Corporation controls half of the world's soft drink market. In some countries their market share is over 50%. The PepsiCo Corporation or the Cadbury Schweppes Corporation occupies much of the rest of the market. This is a worldwide oligopoly.

Finally, many of the recently privatised utilities are now oligopolistic. Although most of them were privatised as monopolies (gas and electricity in particular), the government has introduced competition to make these industries more oligopolistic. See the 'topic' called 'Privatisation' for details.

S-cool exclusive FREE TUTORIAL offer!