Oligopoly (Causes, Types, Scenarios, Characteristics, Advantages, Disadvantages and Examples)

The word Oligopolio has Greek etymological roots Oligo (few) and Polios (sellers), together it translates as “few sellers”, But by taking it to the field of economics it finds its true meaning.

Economically speaking, an oligopoly is a economic scenario, characterized by the offer of a product by few companies, competing with each other seeking to obtain a part of the market.

Among this minimum number of companies a strategic interdependence is observed, this concept is better understood when saying that these organizations are dependent on each other.

eThis statement is given because the decisions and actions taken by one of them regarding the quality or price of the product will be an important influence on the respective decision-making of the others and, of course, also on the competition and the market.

As an example, a leading company increases the number of products it offers, as there are more of them in the market, the price decrease, this can negatively affect the profit of its competitors, otherwise, if the leading company reduces the amount of products.

There can be many examples of oligopolies, for example in the telecommunications sector, telephone companies, television networks, aeronautical industry, automotive and many other similar ones.

In short, a market environment with little competition, where each company can influence prices and goods or services offered to consumers and controlling part of the market but not all of it, it can be called oligopoly.

It is important to note that the term oligopoly is not exclusive to the domestic market where companies are competitors with each otherIt can also apply to countries or a group of them, such is the case of oil exporters.

Causes of Oligopoly

An oligopoly can be generated by at least one of these conditions:

• Difficult to enter the market, a company can enter the competition only when it reaches a significant part of the market.
• Legal barriers can stop the entry of new companies to control a part of the market.
• New companies with low or no reputation, trying to compete with big brands and a lot of history and stable trajectory in the market.
• Entering the competition requires a significant and large capital investment.
• When entering the competition, generally the return on investment is not immediate, practically unfeasible for some companies.
• Large companies can meet market demand at a lower cost than a new one requires.
• Higher cost in technology, research, material resources and the like for new competitors than for established companies.
• Higher profitability for established companies.
• New competitors do not have the same distribution channels as established companies.
• Brand loyalty on the part of consumers and product differentiation, two great aspects that new companies in the market do not have and it is very difficult to achieve it.
• The merger of companies strengthens large companies, which become even larger, encompassing even more market.
• Collusion or the strategy of oligopolistic companies to agree on the same price or the same production to avoid competition, with These all maximize their utility, but close competition to new companies, and in many countries it is an unfair and unfair practice. illegal.

Oligopoly Types

Generally, four types of oligopoly can be observed:

• Differentiated, it is a monopolistic or imperfect competition that includes various goods: cars, airlines, cleaning supplies and the like.
• Concentrated, it is a market concentrated in the industry, it can be observed among the producers of raw materials.
• Concentrated differentiated, it is a combination of the two previous types, in this case the differentiation of goods or services is something very important.
• Competitive, it is characterized by high price competitiveness and high production.

Oligopoly Scenarios

In a market where oligopoly occurs, one of these three scenarios can occur:

1. Leader - Follower, the leading company chooses the price or quantity of its product, this will establish the basis for the follower companies to make decisions on the same aspects
2. Choice of quantities simultaneously, all companies decide their production without knowing the decision of the competition
3. Choosing prices simultaneously, all companies determine the prices of their goods or services without knowing the decision of the competition

Characteristics of an Oligopoly

Oligopolies are characterized by:

• Being a very closed and small group of producers.
• Companies influence the quantity produced and the price of goods or services.
• They are strategically interdependent.
• Goods or services can be differentiated or standardized.
• New companies that want to enter the competition face economic, technological and brand loyalty barriers from large organizations.
• Large initial investment is required.

Advantages of Oligopolies

Among other advantages, oligopolies offer:

• Greater peace of mind and freedom to optimize goods or services since large companies are not usually distracted by competition from newer ones.
• Little effect when small competitors appear.
• They retain specialized human talent by paying better salaries than fledgling companies.
• Better administrative and operational performance than its smaller competitors.
• They adapt quickly to changes in consumer tastes as well as their new needs.

Disadvantages of Oligopolies

Some disadvantages of oligopolies are:

• Protagonism of very few companies.
• The participation and entry of new companies in the market is very limited.
• It weakens the economy since it cancels out competition and the interest of new investors.
• It generates less job opportunity.

Examples of Oligopolies

In general, it can be established that in a universe of 900 companies, where only 10% of them concentrate more than 50% of the market in their sector, it is an oligopoly.

In this case, many examples can be observed, for example OPEC when setting oil prices in the market or its production quantities.

Similar situations can be observed in the food industry, energy or soft drinks, vehicles, lines airlines, products for computing, fixed and mobile telephony, operating systems and almost in any sector of the economy.