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Oligopoly
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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. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%.
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Oligopoly: An oligopoly exists when a few companies dominate an industry. This concentration often leads to collusion among manufacturers, so that prices are set by agreement rather than by the operation of the supply and demand mechanism. For an oligopoly to exist, the few companies do not need to control all the production or sale of a particular commodity or service. They only need to control a significant share of the total production or sales. As in a monopoly, an oligopoly can persist only if there are significant barriers to entry to new competitors. Obviously, the presence of relatively few firms in an industry does not negate the existence of competition.
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Oligopoly is simply a market in which a few firms dominate the industry. The auto industry, oil industry, and grocery chains are just a few examples. The most important aspect of the oligopoly market is that there is competion but the competition is in the form of personal rivalry among the firms. Another important feature of oligopoly is that each firm realizes that the rivals (the other firms in the oligopoly market) react to their pricing, production, and advertizing policies, and that the firm has to react to the rivals' policies. In this environment, because of their fewness they may see an advantage to cooperating with the rivals instead of competiting with them. In many countries, including the US, a conspiracy among the producers to set prices cooperatively is against the anti-trust laws.
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Oligopoly is characterized by competition on features other than price. Price wars, where all the large companies in the market cut prices, tend simply to lead to lower profits, leaving market shares little changed. Instead, oligopolistic firms tend to charge relatively high or ‘premium’ prices but compete through advertising and other promotional means. Existing companies are safe from new companies entering the market because barriers to entry to the market are high. For example, if products are heavily promoted and producers have a number of existing successful brands, it will be very costly and difficult for a new firm to establish its own new brand in the market.
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Oligopoly describes a market dominated by a few firms. In the world market, there are oligopolies in steel production, automobiles and semi-conductor manufacturing. But, oligopoly ... describes conditions in smaller markets where a few gas stations, grocery stores or alternative burger restaurants dominate in their fields. A distinguishing characteristic of oligopoly is the interdependence of firms. Marge and Maggie operate in an oligopoly. The actions of Ostrich Burger effect the actions of Emu Burger and vice versa.
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Readers of OTC will be interested in ETC Group's new report on concentration in corporate power, Oligopoly, Inc. 2005 [1]. ETC's report provides a sector-by-sector analysis that examines the market share of the top 10 companies in the following sectors: Big Pharma, animal pharmaceuticals, biotechnology, pesticides, food and beverage processing and global grocery retailers. Oligopoly, Inc. ... looks at the emerging fields of nanotechnology and synthetic biology.
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