Oligopoly: What you need to know

You might have heard of the term oligopoly before, or maybe you haven't. What is an oligopoly? How does it affect you? Is there such a thing as a good oligopoly? All these questions and more will be answered in this article about oligopoly.



What is oligopoly?

An oligopoly is a market structure in which a few firms dominate the industry, but each has some degree of control over its own prices.

The term "oligopoly" comes from the Greek words oli (few) and poli (city), where oli means few and poli means city.

In this type of market, there are few sellers who have control over price and output decisions, while many buyers compete to buy goods at those prices. The lack of competition results in high barriers to entry for new firms entering the market because they may not be able to survive.

While each firm has some degree of freedom when making decisions about production or setting prices, they must also pay attention to how their actions will affect other competitors in order not to be undercut by them or lose any potential sales due to the lowering prices too much or raising quality standards too high for consumers' tastes (e.g., offering free shipping). In short: It's important for oligopolists not only to know themselves—but also others!

What Are The Characteristics Of An Oligopoly?

  • There are a few firms in the market.
  • The barriers to entry are high.
  • Products in the industry are differentiated (meaning each firm sells a product somewhat different from its competitors).
  • Firms have some control over the prices they charge and the output they produce (but not complete control). This is called price-making power.

There are two types of oligopolies: pure and mixed. Pure oligopolies occur when there are only two firms in an industry and all suppliers sell identical products (e.g., Microsoft Windows versus Apple OSX operating systems), whereas mixed oligopolies have more than two firms that sell similar but not necessarily identical products (e.g., Coca-Cola versus Pepsi-Cola).

How Many Firms Are In An Oligopoly?

The number of firms in an oligopoly market is between 2 and 5. This means that there are fewer firms than in a monopoly market but more than in a perfect competition market.

The reason for this is that when you have more than one firm, each firm has the opportunity to collude with its competitor(s). This type of collusion is called tacit collusion of secret collusion.

What Are The Examples Of Oligopoly?

The telecom sector is a classic example of an oligopoly. When you think about the cell phone industry, it's clear that there are only a few big players. The same is true for energy and banking. In these industries, you have major companies that dominate the market because they control access to a scarce resource or have achieved economies of scale through mass production.

The airline industry is another good example of an oligopoly because it's possible to price tickets based on the number of seats available on each flight (or at least it was until airlines started charging extra fees). If your flight has been overbooked and someone else wants your seat more than you do, then they're willing to pay more than its actual value in order for you to give it up so they can get where they need to go safely and comfortably!

Final words

So hopefully now you have a better understanding of oligopolies and what you need to know about them. Like all economic sectors, oligopolies are constantly evolving, but the same four basic principles can apply to these companies' competition. The way in which they deal with these principles is what will determine the health of their industry, and ultimately, their profitability.

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