The world of economics is full of complex terms like monopoly, oligopoly, oligopsony and duopoly. In this article we are going to explain to you in an easy way what an oligopoly is, what its exact definition is and we will show you some examples so that you can see it in a practical way.
What is an oligopoly?
The term oligopoly is a very common concept in microeconomics . It derives from the Greek and its structure is divided into oligo- (few) and -polio (sell).
From this it follows that an oligopoly is an economic market that is under the control of a small number of sellers, regardless of the good to which they refer.
That is, we can be talking about amarket for material goods such as cars, or a market for services , such as hotels (although this difference is theoretical, since practically the services sector needs goods and vice versa).
The exact definition of what oligopoly means is obtained from the Royal Academy of Language: Concentration of the supply of an industrial or commercial sector in a small number of companies.
At an economic level, it is usually established that to be defined as an oligopoly, the companies that compose it must have control of at least 70% of the market.
Characteristics of an oligopoly
The most interesting thing about this concept are the repercussions that its establishment (as a mercantile system) has on society. Anyway, let’s see all the characteristics of oligopolies.
1. Knowledge of competitors
When a market is dominated by a small group of vendors (or people who offer services) they all know each other . Those involved know at all times against whom they compete, with whom they can ally and what is the exact situation of the rest of the companies.
2. Large capital
All companies in an oligopoly have a large amount of economic and material resources . Otherwise, it is almost impossible to remain and compete in a market system of these characteristics.
3. Greater influence
Since the oligopolistic market (national or international) is completely flooded by a small group of companies, the actions they carry out have a more direct impact . For example, if one lowers prices, automatically all the others must do something (lower prices in general).
This means that the market, if it is not well structured and consolidated, can wobble quite easily, as if it were a table with X number of legs. The fewer legs there are, the more that stability depends on the remaining legs.
4. Diminished competition
Since the oligopolistic system involves a small group of firms, and firms intrinsically tend to be in an equilibrium position, there comes a time (in fact, it is not long in coming) when a situation of non-rivalry is created. .
When the companies that make up the sector have shared “the cake” explicitly or implicitly, they make sure to maximize their profits but without harming each other with the aim that everyone continues to win and maintain their positions.
There are a series of negative effects (which could also be considered characteristics) that follow from oligopolies and that need to be commented on.
1. Impossibility of joining the oligopoly
As a consequence of the above, if a new seller tries to join the oligopoly system, the companies that are already in it will hinder or completely prevent their participation .
Existing companies do not want to have to incorporate new “competitors” with whom they can share “the cake” again and jeopardize the balance that had been achieved.
2. Non-competent companies
In reality, what hides non-competitiveness between companies is the absence of a good company capable of competing with the rest.
Simply stated, an economic system that is oligopolistic is a system where none of the sellers is good enough to appeal to all consumers.(or a majority). That is, there are no companies that offer high quality services or goods at competitive prices.
3. Higher prices
If there is no competition between companies, the immediate result is that prices rise on products that are not even of high quality .
4. Less quantity of production
In addition, the quantity of production in an oligopoly also suffers and companies produce the minimum necessary since they do not have a need to monopolize the market, offering in turn a smaller variety of products/services.
5. Low levels of quality
Finally, also the result of the low competitiveness of the companies that make up the oligopoly,There is no need to increase the quality of the products , so it ends up cutting production costs and thus quality.
Examples of oligopolies
These are the most famous oligopolies that you probably know.
1. Coca Cola and Pepsi
The best known example is undoubtedly the best. Two companies control the world market for soft drinks , specifically cola-flavored drinks.
There are more than two airlines, but even so, they are not many. However, they move an immense amount of capital and choose the prices they offer with some freedom, regardless of the social demand there is.
Also, you should not get confused, although there are airlines with different names,many of them belong to the same owner.
3. P&G and Unilever
It is very possible that you do not know either of them, but you buy their products almost daily since between them they have the “monopoly” of the brands on home, personal and animal care, beverages and food .
Both companies, as if that were not enough, belong to the group of so-called “billion dollar brands”. That is, companies that have brands with which they invoice more than 1,000,000,000 dollars a year.
The first, P&G , owns brands (it has more than 75 brands) such as Gillette, Tampax, Fairy, Ariel, Oral-B, Gucci or Lacoste (perfumes), Duracell, Max Factor and endless other products.
Second, Unilever, owns brands (more than 30 in total) such as Mimosin, Frigo, Calve, Tulipan, Ben & Jerry’s, TRESemme, Dove, Rexona, Lipton…
Difference between oligopoly and monopoly
We have already understood what an oligopoly is and it is likely that The first thing that comes to mind is another similar concept: monopoly.
The difference between monopoly and oligopoly is simple, while in an oligopoly system there is a small group of companies that handle a large part of the market, in a monopoly system, there is only one company .
Bayer, RC (2010). Intertemporal price discrimination and competition. Journal of economic behavior & organization.
Vives, X. (1999). Oligopoly pricing, MIT Press, Cambridge MA. (A comprehensive work on oligopoly theory).
Dixon, H. (2001). Surfing Economics. Essays for the inquiring economist.