What is oligopoly?

Natalya Chekanova
Natalya Chekanova
March 29, 2013
What is oligopoly?

The basis for the development of any trade is competition. But when the market for some goods or services is represented by a small number of participants, competition becomes difficult or impossible. Let's try to understand the features of such a market and find out what oligopoly is.

Oligopoly - characteristic

The word “oligopoly” is of Greek origin: “oligos” is few, few and “field” I sell. Consequently, literally can be translated as "a few sellers."

Oligopoly is a kind of market for certain products, in which the number of participants is extremely limited. As a rule, these are several firms selling homogeneous (identical) goods, each under its own brand. However, the product can be heterogeneous (differentiated).

Sometimes there may be only two such manufacturers, for example, the leaders of the world aircraft construction, Airbus and Boeing. Such an oligopoly is called a duopoly (duo - two).

The share of such firms in the turnover is so large that the presence of other, smaller competitors does not have a significant impact on the market (TU is unlikely to be able to withstand Boeing, Volga - Mercedes).

Pricing

For oligopoly, it is typical to focus on other market participants when setting prices. If the company wants to raise prices, but does so unilaterally, it will certainly lose customers. After all, they will be able to purchase a similar product or service from another company.

It happens that the company, wanting to increase sales, reduces prices (the desire for price leadership). Then the other participants, in order not to suffer losses, have to do the same. Such price wars are often not sustained by weaker companies and, having gone bankrupt, leave the market.

Quite often oligopolies enter into agreements concerning pricing and delimitation of spheres of influence. Such a “collusion” is prohibited by the state, since it leads to the formation of monopolies.

A common phenomenon is a business combination (merger) to withstand larger competitors.

Thus, the main signs of oligopoly are a limited number of participants and a unified pricing policy.