Reviewed by Aug 27, 2020| Updated on
An oligopoly is a form of market structure with a small number of firms providing a particular good or service. The firms display unity in their actions in determining the market conditions, market policies, placing restriction on output, or fixing of prices. The firms collude strategically to earn high returns for all the participants of the oligopoly.
Various factors contribute to the creation of oligopoly. The factors include the concentration of natural resources to certain geographies, access to economic resources for commercial exploitation, technological advantages, and so on. The other critical factor which contributes to the success of oligopoly is favourable government policies.
Oligopolies are seen in different types of business sectors, namely, oil producers, steel manufacturing, grocery trade, tyre manufacturing, and wireless carriers. The renowned and widely acknowledged oligopoly is OPEC (Organization of the Petroleum Exporting Countries). The members of OPEC control the production of crude oil and fix the price. The situation leads to the creation of inelastic demand and enables optimisation of profits.
The oligopoly form is anti-competitive, restricts entry of new technologies, business enterprises, and increases prices at a disadvantage to the ultimate consumer. The many actions of an oligopoly are taken collectively under the leadership of one of the firms. The other members follow the policies laid by the leader. For example, if the leader raises the prices, the other members also raise their product prices.
Oligopoly functions like a cartel, restricting the supply of goods to the consumer, collectively bidding and eliminating competition. The oligopoly functions for the mutual benefit of the members similar to a cartel.
Oligopolies do not benefit forever. An example is the competing products launched by Google in competition to the Microsoft Office platform. New breakthrough technologies pave the way for competition and technologically easy and monetarily affordable products and services.
However, there are sectors which are in the zone of high entry costs, require huge economic resources. In such situations, oligopolies have an advantage from their size, economic influence, and ability to raise high leverage.