What is Oligopoly: Types, Characteristics and Examples

Though, the British ruled period was a time of monopoly trade. But today, when globalization is at its peak, oligopoly is emerging as the leading market strategy. While the governments of a few countries are promoting it, others are banning it. 

 

Now the question arises, what is oligopoly in real life? How to identify it from monopoly? And if it is stable for the market or not. In this blog we will answer all your questions. We will read about the definition of an oligopoly market, its characteristics and consider a few real-life examples.

 

(Learn about Experimental economics)

 

 

What is the meaning of Oligopoly?

 

The term oligopoly is basically related to economics and the market. It is a market controlling term. It may be defined as a market situation in which only a few producers affect the market. 

 

But that doesn’t mean they entirely control the market. The price change of each producer affects the actions of other producers. For instance, a reduction in the price of one producer may lead to an equal deduction by the other producers. 

 

This practice helps in retaining the same earlier share of the market but at lower profits. In oligopolistic industries the process is generally a blend of monopolistic and competitive tendencies. Oligopolies can be followed in several industries such as steel, aluminum and automobile industries.

 

In other words, oligopoly is defined as the market strategy that consists of several small numbers of firms. These firms or producers work explicitly to restrict output and thus control the market returns.

 

(Check out - What is Capital in Economics)

 

 

Types of oligopoly

 

Oligopoly market industries or oligopolistic strategies are classified into following types:

 

Pure oligopoly

 

Pure oligopoly is also known as perfect oligopoly. This strategy has a homogeneous product. For example, the aluminum industry.

 

Imperfect oligopoly
 

Imperfect oligopoly is also known as differentiated oligopoly. This industry has product differentiation at the end. For example, the talcum industry.

 

Open oligopoly

Open oligopoly refers to the market strategy where the new industries can enter in the market and can compete with the existing industries.

 

Closed oligopoly

Closed oligopoly is the opposite of open oligopoly. Here the entry of new or other industries into the market is strictly banned.

 

Collusive oligopoly

 

Collusive oligopoly is basically a cooperative market strategy. It occurs when few firms collaborate to an understanding in reference to the price and results of the products.

 

Competitive oligopoly
 

Competitive oligopoly is the opposite of collusive oligopoly and basically a competitive strategy. This type of oligopoly occurs due to lack of understanding between the industries of the market. Due to which they create invariable competition for one another.

 

Partial oligopoly
 

In this strategy there exists an industry as the price leader. The situation when a particular firm or industry is more powerful in the market as compared to other industries. A large firm basically dominates the entire market.

 

Total oligopoly
 

Total oligopoly is also known as partial oligopoly. It is the opposite of partial oligopoly and no particular industry or firm dominates the market. There is no price leadership in the market.

 

Organized oligopoly

 

As the name suggests this is an organized structure of oligopoly. In this strategy, an association is formed to fix prices, quotas, and output.

 

Syndicated oligopoly

 

Syndicated oligopoly is the opposite of organized oligopoly. In this strategy the industries are allowed to sell their product through a centralized syndicate.

 

(Read, Difference between macro and microeconomics)

 

 

What are the characteristics of oligopoly?

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Characteristics of oligopoly

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The characteristics of an oligopoly market or oligopolistic strategy are mentioned below:

 

Interdependence

 

As in an oligopoly market, the decision of one firm influences the process and working of another firm. Thus, it induces interdependence in the network. It is the most important feature of an oligopolistic market. As this affects the prices and output of the market. A small change in a small firm has a direct impact on its rivals.

 

In order to match the impacts induced, the competitor firms might change their prices and profits. Thus, the oligopoly market is a totally interdependent network.

 

 

Advertising

 

Advertising is the key characteristic of the oligopolistic market. The firms are supposed to employ aggressive market techniques to defend the competition in the market. Due to interdependence, it is essential for the forms to invest a huge amount in the marketing and promotional activities. Thus, advertising has a great importance in an oligopoly strategy. 

 

 

Variable selling price

 

An oligopolistic market is a factor driven market and has interdependence on various factors. Thus, the selling price of the products in this market is quite unstable and varies at different instances.

 

 

Group behavior

 

The process of oligopoly is a group behavior. It is designed in such a way that a single firm can execute selfish behavior or profit-maximizing behavior. If it does, it automatically goes against the fundamentals of an oligopolistic market.

 

 

Entry barriers

 

Generally, it is difficult to enter an oligopolistic market, even in an open oligopoly. As it has to compete as a small start-up industry with large and economically stable firms. Here the most common entry barriers that are observed are as follows:

 

1. Exclusive resource ownership

 

2. Patents and copyrights

 

3. High start-up cost

 

4. Government restrictions

 

 

Few leading firms

 

There are only a few firms that control the entire sales and process of the market. In other words, the large number of firms is quite small in an oligopolistic market.

 

 

Identical or differentiated products

 

Unlike, monopoly market, the oligopoly market produces both kinds of goods, that is identical products and different products.

 

(Suggested Read - What is Deflation?)

 

 

How is oligopoly different from monopoly?

 

In the modern era, there exist different market strategies such as monopoly and duopoly. Monopoly market refers to a market having only one producer. Similarly, duopoly has two producers in the market.

 

While oligopoly is the market strategy that involves a number of producers in the market. The upper limit of the number of producers in oligopoly is not fixed. But generally, the number is maintained in such a way that the decision and action of one industry or producer must affect and influence the others.

 

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What are the major examples of oligopoly market strategy?

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Examples of Oligopoly

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In the modern era oligopoly is the most common market practice. The major examples of oligopoly markets are as follows:

 

Pharmaceutical sector

 

The pharmaceutical market is the most leading global market. It not only leads in drug innovation but also acts as a drug price maker. The pharmaceutical sector is a real example of oligopoly. 

 

As the market is controlled by top firms such as Merck, Pfizer and Abbott. The entry for new firms in this sector is quite limited and restricted.  As the patents are being registered here, it creates a notebook of experience for the future. Also, it can produce both similar and different products.

 

Media sector

 

Media sector is also a kind of oligopoly industry. Comparing the case of India, almost 90% of this sector is captured by leaders such as, The Tribune, ABP news etc. the decision of one producer totally influences the decision of other firms. 

 

And, if we minutely observe, the sector shows group behavior as well. And not a particular producer has the lead. You can yourself check that the prime time for every channel is different. This sector also invests huge amounts in advertising.

 

Computer technology industry

 

This sector is a best example of oligopoly. The entire computer technology market is globally dominated by two leaders named Apple and Windows. Due to their economic growth across the globe, no other firm is trying to enter in this sector. 

 

No matter what computer you choose, the embedded technology will be one of these two only. Thus, this sector serves a perfect example for a closed oligopolistic market.

 

Automobile industry

 

Similarly, the automobile industry is also an example of oligopoly. Let us take the case of India, no doubt, there are several automobile industries. But a dozen of them rule the market. 

 

These include Hyundai, Maruti, etc. Automobile sector is an example of organized oligopoly. As the standards and prices here are maintained by a generated authority.

 

Other examples of oligopoly strategy include following industries:

 

1. The steel industry

 

2. The petroleum industry

 

3. The photographic equipment industry

 

4. The cereal industry

 

5. The wine and beer sector

 

6. The aircraft manufacturing sector

 

7. The beverage industry

 

8. The gold jewelry makers

 

(Difference between Positive and Normative economics)

 

The profits maximization of an oligopoly market is governed by the Kinked demand curve. Oligopoly industries are more stable over other market strategies as they work on collaboration. Thus, they are more beneficial in the era of economic competition. 

 

This strategy also avoids evil practices such as price-fixing. And identifies a price leader in the market, the other firms follow the price leader to maximize their benefits. The government must take essential efforts to expand the network of oligopolistic markets.