Oligopoly
Features of Oligopoly Market with Examples. Oligopoly is a corporate system in which the vast majority of market share is owned by a limited number of companies. An oligopoly is similar to a monopoly, except that two or more firms control the market rather than one firm.
Features of Oligopolistic Market
Below are the main characteristics of the Oligopoly Market:
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Few Dominant Firms
Few large retailers dominate the market for a commodity under the oligopoly. Each vendor has a major impact on the market.
Each corporation has a large degree of monopoly control (when goods are differentiated) and accounts for a large part of the overall market demand. In order to ensure its longevity and success in the industry, it uses all the tools at its disposal to counter the actions of rival firms. Each business thus serves as a strategic competitor.
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Mutual Interdependence
Since the number of companies is limited, the behavior and the potential reaction of rivals must be considered by each (sizeable) company, when making business decisions about its price, production, or promotion. This will allow the company to know how its product customers will react to any such move.
On the one hand, each company is in a position to impact the market price, production, and income of other companies. On the other hand, it cannot hesitate to take account of other companies’ reactions to their pricing and product strategy. There is also a good deal of interdependence between the companies under the oligopoly.
Effective decision-making relies on the analysis of the competing companies’ reactions to the company’s policy decisions. In addition, each organization needs to keep its own decision to be as unforeseeable to competitors as possible. Because more than one reaction pattern is possible from other businesses, before offering a definite and defined solution to price-output fixation under oligopoly, we need to make assumptions about the reaction of others.
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Indeterminate Demand Curve
The dimension of business interdependence has made it very difficult to systematically examine oligopolies. Because of the environment of uncertainty, reciprocal interdependence also allows forecasts and thus optimal decisions rather difficult. No business under the oligopoly is able to envision with some degree of precision the effects of its price-output strategy.
In response to price shifts, product fluctuations, and sale practices by the first company, there is a high degree of ambiguity as to which variable or combination of variables the rival company would use in its reaction pattern. A wide range of patterns of conduct is possible.
And if they decide to come together in pursuit of their interests and enter into an arrangement (as far as the law allows), it may last or it may break down. There are two contrasting behaviors on the part of companies in the industry.
Companies often understand the risks of cooperative rivalry and prefer to partner to increase their shared profits. At other times, each firm’s desire to earn maximum profits can represent disputes between the companies.
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Barriers to Entry
Oligopolistic companies are distinguished by the presence of strong obstacles to entry, unlike monopolistic and perfect competition, where there are no barriers to entry. Such barriers to entry can be normal or hypothetical. On account of economies of scale, natural barriers to entry usually exist. The market conditions for demand could be such that only a few large corporations can function successfully. Other triggers that hinder the entry of new companies could be high initial investment requirements and control of strategic resources with no near replacements.
In addition, patents, trademarks, tariffs, quotas, licenses, other government restrictions, and the differentiation of goods create artificial obstacles to oligopolistic market entry. Due to these barriers to entry, businesses will gain income in the long-run.
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Advertising
With a high cross-elasticity of demand for an oligopoly product, the oligopoly will increase its sales either by advertising its product or by enhancing its quality through non-price competition. These two instruments change demand in favor of the commodity and boost the oligopoly company’s market share.
To sweep the market, the oligopolist can resort to aggressive publicity. Nonetheless, the competing companies will remain cautious about the measures of the business taking action and will begin defensive ads.
Advertising under an oligopoly is an effective and effective marketing device.
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Group Behavior
The group conduct of the companies forming the oligopoly, i.e. whether the companies would collaborate to promote mutual interests or compete against each other, must be understood. There is no commonly accepted community behavior theory.
Unlike other forms of the market, for various reasons, the behavior of a company under oligopoly is unpredictable. Second, there may not be a common purpose for the companies constituting the party. Secondly, by preventing confusion and ruinous competition, businesses may enter into formal or informal collusion to achieve the goal of profit maximization. Finally, a leader can dominate the group.
Examples of Oligopoly Markets
When a few firms dominate a market, an oligopoly is established. These businesses take advantage of their status to maximize their profitability, whether through non-competitive practices, government regulations or technical expertise. Technology, pharmaceuticals, and health insurance firms have been active in developing oligopolies in the United States.
Computer Operating Systems
When companies provide unique products that are backed by an ecosystem of supporting technology, new high-tech markets can become oligopolies. In 2012, computer operating systems were dominated by Windows from Microsoft, Mac OS from Apple, and the open-source Linux operating system. According to the Stat Owl website, these three systems capture close to 100 percent of the computer operating system market due to their existing positions. All other suppliers of software render programs that are compliant with these systems, further increasing the supremacy of the major players.
Smart Phone Operating Systems
Similarly, a handful of businesses dominate the mobile phone industry, the most dominant two being Google Android and Apple OS. Those businesses have extensive relationships with the suppliers of handsets and can have their device pre-installed on each phone. These relationships, as with computer operating systems, become self-reinforcing as they expand.
Pharmaceutical Industry
Owing to the staggering costs of producing and selling new medicines and because of patents shielding new products from the competition, the pharmaceutical industry is becoming an oligopoly. According to Forbes magazine, it may cost more than $1 billion to create a new medication, have it approved by the Food and Drug Administration and get it to market. Just a handful of firms, including Pfizer, Merck, and Novartis, can afford to produce and market new goods with these types of upfront expenses. The government awards expanded patents on its products to those firms, and these patents have been shielding drug creators from competition for many years.
Health Insurance
Health insurance is a heavily regulated sector at the state and federal levels with a range of government requirements. Insurers are mandated by the 2010 Patient Safety and Affordable Care Act to accept more high-risk patients as clients and to provide all their clients with adequate coverage. A handful of existing businesses, such as Humana, Cigna, Aetna, and WellPoint, favor such limitations. Some analysts believe that corporations would grow into an oligopoly capable of enduring new legal mandates.
