What is an Oligopoly?


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An oligopoly is a market structure in which a small number of firms have the large majority of market share. This typically happens in industries that have high barriers to entry, such as the automobile industry, airline industry, or telecommunications industry.

In an oligopoly, the dominant companies are aware of each other’s actions and decisions. This means the market often demonstrates a tendency towards collusion, where the few companies decide to cooperate (explicitly or implicitly) rather than compete. They may set prices collectively, seeking to maximize joint profits rather than compete and potentially jeopardize individual profits.

Alternatively, oligopolies can engage in non-collusive competition, where they compete with each other but are highly interdependent. Changes in price, output, or product quality by one firm will significantly impact its competitors, often triggering a response.

One key characteristic of an oligopoly is the occurrence of price stickiness or rigidity. Firms in an oligopoly are often reluctant to change prices. If one firm lowers its price, others will likely follow, leading to lower profits for all. If a firm raises its price but others don’t, it will likely lose market share.

Oligopolies can lead to less competition and higher prices for consumers compared to more competitive market structures. However, they can also result in benefits such as economies of scale, potentially leading to lower costs and prices. It’s also worth noting that the behaviors and outcomes in an oligopolistic market can vary widely and can be quite complex to analyze.

Example of an Oligopoly

Let’s take the commercial aviation industry as an example of an oligopoly.

In many countries, only a few major airlines dominate the market. For instance, in the United States, four airlines (American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines) control around 80% of the market. These companies effectively set the price and service standards in the industry.

The aviation industry is an example of an oligopoly for several reasons:

  • High barriers to entry: It requires a huge amount of capital to buy airplanes, hire and train staff, secure airport slots, and meet regulatory requirements. These factors prevent new competitors from easily entering the market.
  • Interdependence: Decisions made by one airline, like pricing, directly affect the other airlines. If one airline starts to reduce its fares, others will likely follow to maintain their market share.
  • Price rigidity: Airfares don’t change rapidly in this market due to the fear of price wars. If one airline significantly drops its price and others follow, this could lead to a race to the bottom, which might hurt all the players involved.

Despite these challenges, competition still exists within the oligopoly. Airlines compete on routes, service quality, flight times, and more. But the market is heavily dominated by the few major players, and their decisions significantly influence the overall industry dynamics.

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