An oligopoly is market form in which a market is dominated by a
small number of sellers (oligopolists). The word is derived from
the Greek for few sellers. Because there are few participants in
this type of market, each oligopolist is aware of the actions of
the others. Oligopolistic markets are characterised by
interactivity. 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. An oligopy is a form of
economy. 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%. An example
would be Indian mobile industry , with a four-firm concentration
ratio of over 70% and the cold drink industry also in the U.S.A has
a two firm concentration ratio of a staggering 85%.
In an oligopoly, firms operate under imperfect competition, the
demand curve is kinked to reflect inelasticity below market price
and elasticity above market price, the product or service firms
offer are differentiated and barriers to entry are strong.
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.
In industrialized countries oligopolies are found in many
sectors of the economy, such as cars, consumer goods, and steel
production. Unprecedented levels of competition, fueled by
increasing globalisation, have resulted in the emergence of
oligopsony in many market sectors, such as the aerospace industry.
There are now only a small number of manufacturers of civil
passenger aircraft. A further instance arises in a heavily
regulated market such as wireless communications. Typically the
state will license only two or three providers of cellular phone
services.
Oligopolistic competition can give rise to a wide range of
different outcomes. In some situations, the firms may collude to
raise prices and restrict production in the same way as a monopoly.
Where there is a formal agreement for such collusion, this is known
as a cartel. 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.
