Oligopoly

An oligopoly is a market structure characterised by the dominance of a few large firms. Each firm has a large market share and the actions of one directly affect the actions of others.

Features of an Oligopoly

Few dominant firms: Typically, an oligopoly is dominated by a few large firms each holding significant market share.
Barriers to entry: High start-up costs, powerful brands and patents often create barriers for new firms to enter the market.
Interdependence of firms: Each firm must consider potential reactions from other firms before taking strategic decisions about prices, production, and other policies.
Non-price competition: Firms often compete on factors other than price, for example brand image or customer service due to fear of starting price war.

Advantages of Oligopoly

Economies of scale: As the firms are large, they can exploit economies of scale, leading to lower average costs and potential for lower prices.
Research and development: The high revenues often allow for substantial investment in research and development leading to innovation and improved products.
Stable prices: Interdependence can lead to price stability in the market, which can be beneficial for consumers.

Disadvantages of Oligopoly

Higher prices: Firms may use their market power to drive up prices, which may disadvantage consumers.
Inefficiency: With little competition, firms may not be incentivised to minimise costs or improve their offerings, leading to productive and allocative inefficiency.
Reduced consumer sovereignty: With few firms, consumer choice can be limited, reducing consumer sovereignty.

Examples of Oligopoly

The supermarket industry in the UK is a classic example of an oligopoly with a few large players (Tesco, Asda, Sainsbury’s, Morrisons) dominating the market.
The global auto industry is characterised as an oligopoly, with a handful of companies controlling the majority of the market share.

Importance of Oligopoly

Oligopolies can have both positive and negative impacts on consumers and the economy. Their market dynamics and the interplay among firms significantly inform competition policies and regulatory decisions.

In summary, understanding oligopoly is important for policy decisions, strategic business actions and understanding market behaviour. Increased knowledge of oligopolies can also inform debates around monopolies, regulation, and competition.