3/6/2017 Oligopoly

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OLIGOPOLY
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Anoligopolyisamarketconditioninwhichtheproductionofidenticalorsimilarproductsisconcentratedinafewlargefirms.Examplesofoligopoliesinthe
UnitedStatesincludethesteel,aluminum,automobile,gypsum,petroleum,tire,andbeerindustries.Theintroductionofnewproductsandprocessescan
createnewoligopolies,asinthecomputerorsyntheticfiberindustries.Oligopoliesalsoexistinserviceindustries,suchastheairlinesindustry.

Anoligopolymaybecategorizedaseitherahomogeneousoligopolyoradifferentiatedoligopoly.Inahomogeneousoligopolythemajorfirmsproduce
identicalproducts,suchassteelbarsoraluminumingots.Pricestendtobeuniform(/knowledge/Uniform.html)inhomogeneousoligopolies.Ina
differentiatedoligopoly,similarbutnotidenticalproductsareproduced.Examplesincludetheautomobileindustry,thecigaretteindustry,andthesoftdrink
industry.Indifferentiatedoligopoliescompaniesattempttodifferentiatetheirproductsfromthoseoftheircompetitors.Totheextentthattheyareableto
establishdifferentiatedproducts,companiesmaybeabletomaintainpricedifferences.

Beingpartofanoligopolyaffectsacompany'scompetitivebehavior.Inacompetitivemarketsituationthatisnotanoligopoly,firmscompetebyactingfor
themselvestomaximizeprofitswithoutregardtothereactionsoftheircompetitors.Inanoligopoly,afirmmustconsidertheeffectsofitsactionsonothers
intheindustry.Whilesmallerfirmsmayoperateatthefringesofanoligopolywithoutaffectingtheotherfirmsintheindustry,theactionsofamajorfirmin
theoligopolytypicallycausereactionsintheotherfirmsintheindustry.Forexample,ifonecompanyintheoligopolyattemptstounderselltheothers,then
theotherfirmswillrespondbyalsoloweringprices.Asaresult,pricecutsinoligopoliestendtoresultinlowerprofitsforallofthefirmsinvolved.

Pricesinoligopolisticindustriestendtobeunstabletotheextentthatcompanieswillshade,orlower,theirpricesslightlytogainacompetitiveadvantage.It
mustberememberedthatcollusion(/knowledge/Collusion.html)betweenfirmstofixprices(/knowledge/Price_fixing.html)isillegalunderU.S.antitrust
laws,sooligopoliesmustreachindustryagreementsonpricingindirectly.Companiescansignaltheirpricingintentionsindirectlyinavarietyofways,such
asthroughpressreleases,speechesbyindustryleaders,orcommentsgivenininterviews.Insomecasesthereisarecognizedpriceleaderinthe
oligopoly,andotherfirmsintheoligopolysettheirpricesaccordingtothatoftheindustry'spriceleader.

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3/6/2017 Oligopoly
Industrialconcentrationisamatterofdegree.Thismeansthatthereisnoabsolutedefinitionofanoligopolyintermsofthenumberoffirmsaccountingfora
certainpercentageofanindustry'soutput(/knowledge/Output.html).IntheUnitedStatestheCensusofManufacturersreportsoneachindustry'sfourfirm
concentrationratio.Thisfigureindicateswhatpercentageofanindustry'soutputisaccountedforbyitsfourlargestcompanies.Itisnotuncommonforthe
fourlargestfirmstoaccountfor30percentormoreofanindustry'soutput,andinsomecasestheyaccountformorethan70percentofproduction.
IntheUnitedKingdom,forexample,thetopfourfoodretailersaccountedfor45to67percentofthenation's$150billiongrocerymarket
(/knowledge/Grocery_store.html)in1998.InRussia,economicdevelopmentunderBorisYeltsin(/knowledge/Boris_Yeltsin.html)hasbeendescribedasa
"newoligarchy,"inwhichgovernmentofficialsandbusinessleadersjointogethertogaincontrolofindustriessuchasbanking,television,thebusiness
press,andothercompanies.

Oligopoliestendtodevelopinindustriesthatrequirelargecapitalinvestments.Studieshaveshownthatindustrieswithhighfourfirmconcentrationratios
tendtohavehighermarginsthanotherindustries.Inordertomaintainanoligopoly,potentialinvestorsmustbediscouragedfromestablishingcompeting
companies.Oligopoliesareabletoperpetuatethemselvesanddiscouragenewinvestmentsinseveralways.Insomecasestheoligopolyistheresultof
accesstokeyresources,whichmaybeeithernaturalresourcesorsomepatentedprocessorspecialknowledge.Newfirmscannotentertheindustry
withoutaccesstothoseresources.

Theestablished,experiencedfirmsinanoligopolyalsoenjoysignificantcostadvantagesthatmakeitdifficultfornewfirmstoentertheindustry.Thesecost
advantagesmaybetheresultofthelargescaleofproductionrequiredaswellasofexperienceinkeepingmanufacturingoroperatingcostsdown.Another
factorthattendstoperpetuateoligopoliesisthedifficultyofintroducingnewproductsintoanoligopolycharacterizedbyahighdegreeofproduct
differentiation.Prohibitivelylargeexpenditureswouldberequiredofanewfirmtoovercomeconsumerreluctancetotryanewproductoveranestablished
one.Finally,oligopoliesperpetuatethemselvesthroughpredatory(/knowledge/Predation.html)practicessuchasobtaininglowerpricesfromsuppliers,
establishingexclusivedealerships,andpredatorypricingaimedatdrivingsmallercompetitorsoutofbusiness.
SEEALSO:Competition(../CloCon/Competition.html)

[DavidPBianco]

FURTHERREADING:
"BehindtheThrone."Economist,12September(/knowledge/September_12.html)1998,76.
Lanchner,David."ARussian'TooBigtoTopple.'"GlobalFinance,January1997,20.

Morais,RichardC."SqueezedLemons."Forbes,14December(/knowledge/December_14.html)1998,15052.
Zachary,G.Pascal."Let'sPlayOligopoly!:WhyGiantsLikeHavingOtherGiantsAround."WallStreetJournal,8March(/knowledge/March_8.html)1999,
B1.

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