Oligopoly Characteristics

An oligopolistic market is commonly found world over. Read this article to learn what exactly is an oligopolistic market and the various oligopoly characteristics which define this market.

In economics, the idea of competition has a very broad usage. Competition is like the foundation for various free market economies and even capitalistic economies for that matter. Different market structures are a result of varying levels of competition prevalent in the particular market. Perfect competition, monopolistic competition, monopoly and oligopoly are the different market structures formed on the basis of competition. Each of this market structure has peculiar characteristics, which help economists decide desirability of these markets depending upon the society. Oligopolistic market structures are fairly common and a few key oligopoly characteristics are discussed further. Read more on characteristics of monopoly.

What is an Oligopolistic Market ?

An oligopolistic market is the one which is dominated by some large suppliers. In an oligopolistic market, the leading firms account for a large percentage of market share. Firms manufacture branded products and high competition among them results in tremendous advertising and marketing spends by these firms. Leading forms are able to make abnormal profits in the long run, as new firms have numerous entry barriers. As all firms in an oligopolistic market are interdependent, they need to consider impact and reactions on other firms while determining their own pricing and investment policies. Homogeneous products, mutual interdependence, few large producers and high entry barriers are oligopoly characteristics prevalent in such markets.

The car automobile industry is a very good example of an oligopolistic market. There are various competitors in this market but the dominant ones include General Motors, Honda, Chrysler, Toyota and Ford. Entry barriers prevent other entrants and pricing is mostly by competition and mutual understanding between top manufacturers.

What are the Characteristics of Oligopoly?

The three most important characteristics of oligopoly include:

• Industry dominance by few large firms
• Products sold by these firms are either differentiated or identical in nature
• Various entry barriers depending upon the industry

Few Large Firms

This is a very crucial oligopoly characteristic which states that these markets include few large firms which are dominant in existence, and each one of these firms is comparatively larger than the market size. This particular oligopoly characteristic ensures that all large firms have a fair amount of market control, not seen in a monopoly market. In spite of there being other smaller firms in the market, the major ones account for more than half of the total industry output. For example, in a hypothetical telecommunications market, out of the 25 firms doing business the top 5 firms are responsible for 65% of the total industry sales, while the figure shoots up to 80% if the top 10 firms are taken into consideration.

Homogeneous or Differentiate Products

Certain industries in an oligopolistic market manufacture homogeneous products, like in a perfect competition market, while others manufacture differentiated products like in an monopolistic market. It can thus be inferred that oligopolistic markets are found in two separate categories:

• Homogeneous Product Oligopoly: Industries in these markets produce intermediate goods which are use by other different industries later on for manufacturing their products. Examples include — steel, petroleum and aluminum industries.
• Differentiate Product Oligopoly: Goods manufactured in these kinds of markets are for personal consumption. Consumers need a variety of products, as they have different needs and wants. Examples include — computers, household products and automobile industry.

Entry Barriers

Entry barriers helps existing firms to exercise market control. Government restrictions, copyright issues, huge setup cost and undivided resource ownership are common barriers to entry. This particular feature also helps in differentiating an oligopolistic market from a monopolistic market, as new firms can enter a monopolistic market and reduce dominance of the large firm. For example, if a new firm tries to enter the hypothetical telecommunications market discussed earlier it will have to compete against already existing brand names, set-up a manufacturing unit without any initial sales or income from the business and will also need to come up with innovative production techniques to sustain it self in the long run. All these barriers make it difficult for the new entrant to enter the oligopolistic market, irrespective of the product.

Apart from this, few other oligopoly characteristics include — tendency to keep price rigid, practice of non-price competition, inclinations towards mergers or collaborations and decision making through mutual consent.

Read more on:

• Monopoly
• Business Competition

Pricing decisions in an oligopolistic market structure are not decided by any standard theory or practice. However, due to competition among all top firms, prices do remain stable. Like, if a firm reduces product price others follow suite and cut down their price as well. Also, if a firm increases product price, others do not increase their price and hence consumers benefit. Thus, oligopolistic markets ensure healthy competition due to peculiar oligopoly characteristics which enables the society to feel secure.