An oligopoly is a market structure where few firms control the market and could collude together to fix prices and prevent any competition from entering the market. Oligopoly is similar to a monopoly except that an Oligopoly is made of more than one company whereas a monopoly consists of just one company.
Why does Oligopoly exist?
Companies form oligopolies when the benefit of collaborating outweighs that of competing with each other in a free market. The most outstanding benefit is the ability to increase revenue by fixing prices.
Colluding together also makes it possible for an oligopoly to raise the barrier of entry, therefore reducing the chances of new competitors entering the market.
Benefits and drawbacks of Oligopoly
For the most part, the biggest benefactors of an oligopoly are the companies involved. They get to enjoy sustained revenue without competition. However, it also ensures a level of stability in the prices of goods and services.
But stable doesn’t really mean fair because customers may not be getting their money’s worth. This is why competition is essential in a market. An oligopoly slows innovation due to low levels of competition.
In essence, the ones who lose the most are the customers because they have limited choices, they shouldn’t expect to see any meaningful innovation in the industry for a while, and they have no control over the prices of the goods.
Factors that make it possible
Some of the factors that make it possible for an oligopoly to exist are high barriers to entry, lack of government intervention, few players in the industry, control of indispensable resources, economies of scale, and proprietary technology.
Examples of Oligopoly
Oligopoly exists in industries like oil and gas, mass media, railroad, wireless service providers, social media, and even the airline industry. Wherever there is a steep barrier to entry and very few companies, there is a likelihood that an oligopoly will exist in such a market.