Dictionary: oligopoly   (ŏl'ĭ-gŏp'ə-lē, ō'lĭ-)

A market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors.

[OLIGO– + (MONO)POLY.]

A situation in which a particular market is controlled by a small group of firms.

An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

Investopedia Says:
The retail gas market is a good example of an oligopoly because a small number of firms control a large majority of the market.

Related Links:
Check out the history and reasons behind antitrust laws, as well as the arguments over them. Antitrust Defined
Getting big quickly looks good, but companies can get into trouble when they do it too fast. Find out how to spot this trouble. Is Growth Always A Good Thing?
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! Economics Basics

Market situation in which a small number of selling firms control the market supply of a particular good or service and are therefore able to control the market price. An oligopoly can be perfect-where all firms produce an identical good or service (cement)-or imperfect-where each firm's product has a different identity but is essentially similar to the others (cigarettes). Because each firm in an oligopoly knows its share of the total market for the product or service it produces, and because any change in price or change in market share by one firm is reflected in the sales of the others, there tends to be a high degree of interdependence among firms; each firm must make its price and output decisions with regard to the responses of the other firms in the oligopoly, so that oligopoly prices, once established, are rigid. This encourages nonprice competition, through advertising, packaging, and service-a generally nonproductive form of resource allocation. Two examples of oligopoly in the United States are airlines serving the same routes and tobacco companies. See also Oligopsony.

Marketing situation in which there are only a few competitors (usually large companies) for customers in a particular industry and where each of the competitors is sensitive to the others' marketing strategies, particularly in the area of product price. The automobile industry in the United States is an oligopoly because only six firms (General Motors, Ford, Chrysler, Honda, Toyota, and Nissan) account for almost 90% of U.S. Automobile sales. See also monopoly; monopsony.

An oligopoly is an intermediate market structure between the extremes of perfect competition and monopoly. Oligopoly firms might compete (noncooperative oligopoly) or cooperate (cooperative oligopoly) in the marketplace. Whereas firms in an oligopoly are price makers, their control over the price is determined by the level of coordination among them. The distinguishing characteristic of an oligopoly is that there are a few mutually interdependent firms that produce either identical products (homogeneous oligopoly) or heterogeneous products (differentiated oligopoly).

Mutual interdependence means that firms realize the effects of their actions on rivals and the reactions such actions are likely to elicit. For instance, a mutually interdependent firm realizes that its price drops are more likely to be matched by rivals than its price increases. This implies that an oligopolist, especially in the case of a homogeneous oligopoly, will try to maintain current prices, since price changes in either direction can be harmful, or at least nonbeneficial. Consequently, there is a kink in the demand curve because there are asymmetric responses to a firm's price increases and to its price decreases; that is, rivals match price falls but not price increases. This leads to "sticky prices," such that prices in an oligopoly turn out to be more stable than those in monopoly or in competition; that is, they do not change every time costs change. On the flip side, the sticky-price explanation (formally, the kinked demand model of oligopoly) has the significant drawback of not doing a very good job of explaining how the initial price, which eventually turns out to be sticky, is arrived at.

Airline markets and automobile markets are prime examples of oligopolies. We see that as the new auto model year gets under way in the fall, one car manufacturer's reduced financing rates are quickly matched by the other firms because of recognized mutual interdependence. Airlines also match rivals' fares on competing routes.

In oligopolies, entry of new firms is difficult because of entry barriers. These entry barriers may be structural (natural), such as economies of scale, or artificial, such as limited licenses issued by government. Firms in an oligopoly, known as oligopolists, choose prices and output to maximize profits. However, firms could compete along other dimensions as well, such as advertising, location, research and development (R&D) and so forth. For instance, a firm's research or advertising strategies are influenced by what its rivals are doing. When one restaurant advertises that it will accept rivals' coupons, others are compelled to follow suit.

The rivals' responses in an oligopoly can be modeled in the form of reaction functions. Sophisticated firms anticipating rivals' behavior might appear to act in concert (conscious parallelism) without any explicit agreement to do so. Such instances pose problems for antitrust regulators. Mutually interdependent firms have a tendency to form cartels, enabling them to coordinate price and quantity actions to increase profits. Besides facing legal obstacles, cartels are difficult to sustain because of free-rider problems. Shared monopolies are extreme cases of cartels that include all the firms in the industry.

Given that mutual interdependence can exist along many dimensions, there is no single model of oligopoly. Rather, there are numerous models based on different behavior, ranging from the naive Cournot models to more sophisticated models of game theory. An equilibrium concept that incorporates mutual interdependence was proposed by John Nash and is referred to as Nash equilibrium. In a Nash equilibrium, firms' decisions (i.e., price-quantity choices) are their best responses, given what their rivals are doing. For example, McDonald's charges $2.99 for a Value Meal based on what Burger King and Wendy's are charging for a similar menu item. McDonald's would reconsider its pricing if its rivals were to change their prices.

The level of information that firms have has a major influence on their behavior in an oligopoly. For instance, when mutually interdependent firms have asymmetric information and are unable to make credible commitments regarding their behavior, a "prisoner's dilemma" type of situation arises where the Nash equilibrium might include choices that are suboptimal. For instance, individual firms in a cartel have an incentive to cheat on the previously agreed-upon price-output levels. Since cartel members have nonbinding commitments on limiting production levels and maintaining prices, this results in widespread cheating, which in turn leads to an eventual breakdown of the cartel. Therefore, while all firms in the cartel could benefit by cooperating, lack of credible commitments results in cheating being a Nash equilibrium strategy—a strategy that is suboptimal from the individual firm's standpoint.

Models of oligopoly could be static or dynamic depending upon whether firms take intertemporal decisions into account. Significant models of oligopoly include Cournot, Bertrand, and Stackelberg. Cournot oligopoly is the simplest model of oligopoly in that firms are assumed to be naive when they think that their actions will not generate any reaction from the rivals. In other words, according to the Cournot model, rival firms choose not to alter their production levels when one firm chooses a different output level. Cournot thus focuses on quantity competition rather than price competition. While the naive behavior suggested by Cournot might seem plausible in a static setting, it is hard to image real-world firms not learning from their mistakes over time. The Bertrand model's significant difference from the Cournot model is that it assumes that firms choose (set) prices rather than quantities. The Stackelberg model deals with the scenario in which there is a leader firm in the market whose actions are imitated by a number of follower firms. The leader is sophisticated in terms of taking into account rivals' reactions, while the followers are naïve, as in the Cournot model. The leader might emerge in a market because of a number of factors, such as historical precedence, size, reputation, innovation, information, and so forth. Examples of Stackelberg leadership include markets where one dominant firm dictates the terms, usually through price leadership. Under price leadership, the leader firm's pricing decisions are consistently followed by rival firms.

Since oligopolies come in various forms, the performance of such markets also varies a great deal. In general, the oligopoly price is below the monopoly price but above the competitive price. The oligopoly output, in turn, is larger than that of a monopolist but falls short of what a competitive market would supply. Some oligopoly markets are competitive, leading to few welfare distortions, while other oligopolies are monopolistic, resulting in dead weight losses. Furthermore, some oligopolies are more innovative than others. Whereas the price-quantity rankings of oligopoly vis-à-vis other markets are relatively well established, how oligopoly fares with regard to R and D and advertising is less clear.

Bibliography

Cournot, Augustin. (1963). Researches into the Mathematical Principles of the Theory of Wealth. Homewood, IL: Irwin.

Friedman, James W. (1983). Oligopoly Theory. Cambridge, UK: Cambridge University Press.

Fudenberg, Drew, and Tirole, Jean. (1986). Dynamic Models of Oligopoly. London: Harwood.

Goel, Rajeev K. (1999). Economic Models of Technological Change. Westport, CT: Quorum Books.

Shapiro, Carl. (1989). "Theories of Oligopoly Behavior." In Handbook of Industrial Organization, vol. 1, ed. Richard Schmalensee and Robert D. Willig. Amsterdam: North-Holland.

[Article by: RAJEEV K. GOEL]

The domination by a few firms of a particular industry. In order to maintain their share of the market, such firms are forced to imitate each other's behaviour. A classic example was the introduction of unleaded petrol by both Shell and Esso almost at the same time. Elsewhere, more dubious examples are price-fixing and the way in which the market is shared out between competing firms.

Market in which there are few sellers, so that they can control the price and/or quantity of goods supplied, by explicit collusion or game-theoretic strategy. Most political markets, such as the market in which political parties sell policies, are oligopolistic.

For more information on oligopoly, visit Britannica.com.

An industry in which a few large sellers of substantially identical products dominate the market, see 118 F. Supp. 41, 47; e.g., the automobile industry is an oligopoly. An oligopolistic industry is more concentrated than a competitive one but is less concentrated than a monopoly.

Control over the production and sale of a product or service by a few companies.

• Platform: IBM PC Compatible
• Release Date: 1988

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few (entities with the right to) sell. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion.

Contents 1 Description 2 Demand curve 3 Oligopsonies 4 Examples 5 References 6 See also 7 External links

Description

Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other.

The welfare analysis of oligopolies suffers, thus, from a sensitivity to the exact specifications used to define the market's structure. In particular, the level of deadweight loss is hard to measure. The study of product differentiation indicates oligopolies might also create excessive levels of differentiation in order to stifle competition.

Oligopoly theory makes heavy use of game theory to model the behaviour of oligopolies:

• Stackelberg's duopoly. In this model the firms move sequentially (see Stackelberg competition).
• Cournot's duopoly. In this model the firms simultaneously choose quantities (see Cournot competition).
• Bertrand's oligopoly. In this model the firms simultaneously choose prices (see Bertrand competition).

Demand curve

Above the kink, demand is relatively elastic because all other firm’s prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and the kink point. While a theoretical model proposed in 1947, it has failed to receive conclusive evidence for support.

In an oligopoly, firms operate under imperfect competition . Following from the fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-price competition in order to accrue greater revenue and market share.

"Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend - the "kink." Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.

Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity.

The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price-elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run.

Oligopsonies

Oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in markets for inputs where a small number of firms are competing to obtain factors of production. This also involves strategic interactions but of a different nature than when competing in the output market to sell a final output. Oligopoly refers to the market for output while oligopsony refers to the market where these firms are the buyers and not sellers (eg. a factor market). A market with a few sellers (oligopoly) and a few buyers (oligopsony) is referred to as a bilateral oligopoly.

Examples

In the United Kingdom, the four-firm concentration ratio of the supermarket industry is 74.4% (2006)^[1]; the British brewing industry has a staggering 85% ratio. In the U.S.A., oligopolistic industries include the oil, beer, tobacco, accounting and audit services, aircraft, military equipment, and motor vehicle industries.

Many media industries today are essentially oligopolies. Six movie studios receive 90 percent of American film revenues, and four major music companies receive 80 percent of recording revenues. There are just six major book publishers, and the television industry was an oligopoly of three networks- ABC, CBS, and NBC-from the 1950s through the 1970s. Television has diversified since then, especially because of cable, but today it is still mostly an oligopoly (due to concentration of media ownership) of five companies: Disney/ABC, CBS Corporation, NBC Universal, Time Warner, and News Corporation.^[2]

In industrialized countries oligopolies are found in many sectors of the economy, such as cars, auditing, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation, have resulted in the emergence of oligopoly in many market sectors, such as the aerospace industry. Market shares in oligopoly are typically determined on the basis of product development and advertising. There are now only a small number of manufacturers of civil passenger aircraft, though Brazil (Embraer) and Canada (Bombardier) have fielded entries into the smaller-market passenger aircraft market sector. A further instance arises in a heavily regulated market such as wireless communications. In some cases states have licensed only two or three providers of cellular phone services.

OPEC is another example of an oligopoly, although on the level of national bodies instead of corporate bodies. There are a few countries that try to control the production of oil.

A further example are the 3 leading food processing companies, Kraft, PepsiCo and Nestle. Together these three corporations account for a large percentage of overall global processed food sales. These three companies are often used as an example of "The rule of 3"^[3], which states that markets and industries often become dominated by three major oligopolistic firms.

The city council of Arcata, California has passed a moratorium on marijuana dispensaries, grow facilities, and processing facilities. This moratorium freezes the ability to pass permits to open any of the above facilities. This has caused an oligopoly consisting of the three existing dispensaries not affected by this moratorium. The three dispensaries now have a government-enforced advantage.

Australia has two very good examples of oligoplies. One is its media outlets, mostly owned by either News Corporation or Fairfax Media. Likewise, Australia's retailing industry is dominated by two companies, Coles-Myer and Woolworths.

References

1. ^ http://news.bbc.co.uk/1/hi/business/4785544.stm Probe says 'too few supermarkets' BBC News website, 31 October 2007
2. ^ Rodman, George. Mass Media in a Changing World. New York: McGraw Hill, 2nd ed. 2008.
3. ^ SHETH Jagdish, SISODIA Rajendra, THE RULE OF THREE. New York: Boston Publishing Co.

See also

• Market form
• Duopoly
• Perfect competition
• Monopsony
• Oligopolistic reaction
• Oligopsony
• Monopoly
• Big Business

External links

• BasicEconomics.info - Oligopoly Market Structure
• Microeconomics by Elmer G. Wiens: Online Interactive Models of Oligopoly, Differentiated Oligopoly, and Monopolistic Competition
• Vives, X. (1999). Oligopoly pricing, MIT Press, Cambridge MA. (A comprehensive work on oligopoly theory)
• Oligopoly Watch A blog on current oligopoly issues from a business and social perspective
• Simulations in Managerial/Business Economics
• Simulations in Principles of Economics

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - oligopol, markedssituation hvor markedet domineres af en lille gruppe producenter

Nederlands (Dutch)
oligopolie (beperkte concurrentie)

Français (French)
n. - oligopole

Deutsch (German)
n. - Oligopol

Ελληνική (Greek)
n. - (οικον.) ολιγοπώλιο

Italiano (Italian)
oligopolio

Português (Portuguese)
n. - oligopólio (tipo de mercado em Economia)

Русский (Russian)
олигополия

Español (Spanish)
n. - oligopolio

Svenska (Swedish)
n. - (ekon)oligopol

中文（简体） (Chinese (Simplified))
求过于供的市场情况, 寡头卖主垄断

中文（繁體） (Chinese (Traditional))
n. - 求過於供的市場情況, 寡頭賣主壟斷

한국어 (Korean)
n. - 소수독점

日本語 (Japanese)
n. - 寡占, 売手寡占

العربيه (Arabic)
‏(الاسم) منافسه محدودة بين عدد صغير من المنتجين او البائعين‏

עברית (Hebrew)
n. - ‮שוק עם מעט מתחרים‬

If you are unable to view some languages clearly, click here.

To select your translation preferences click here.