Oligopoly Market Structure– A practical approach to understand the concept

oligopoly market structure

Oligopoly market structure or merely a market situation, where few large firms are dominating the whole industry. The companies in an oligopoly market structure may produce the same or identical product or delivering a differentiating product. In both cases, they compete on price against each other.

Suppose you are sitting in your room at Karachi while reading this article. Just take a look around you for a while. The fluorescent light above is either manufactured by Philips or Sogo; the cellular network on your mobile phone is provided by Mobilink, Telenor, Ufone or Warid and goes on.

If you are reading this article over a tab or a mobile phone, the operating system inside it is either iOS(Apple) or Android (Google); if it’s a PC or a laptop, the chip inside it is most likely manufactured by Intel or AMD. If you shave, your razor might be a Gillette, Treat or a 7 O’clock. You need a search engine; you go to Google, Yahoo or Bing. You feel a need for a cost-effective and advance antivirus for your device; you order to get Avast, McAfee, Panda or Symantec antivirus software packages.

I deliberately pointed out only specific items around you, whose firms are, though few but they are large, satiating the needs of almost all relevant customers by their bulk share of the market. All of these firms are representative of their concerned industries under oligopoly market structure.

A few Definitions of Oligopoly Market Structure

Oligopoly as the word suggests (Greek "olig" means a few and “polein” means to sell) a few to sell a product.

“In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry” - Investopedia.com

“A market structure characterized by few sellers and interdependent price/output decisions” -McGraw Hill

“Oligopoly is defined as a market structure in which there are few large sellers. The simplest case of oligopoly is duopoly that prevails when there are only two sellers of a product in the market- Ghai & Gupta

"Oligopoly describes a market with only a few producers."- Fred Gottheil

“An oligopoly is a market dominated by a small number of strategically interacting firms.”- Robert Hall, Marc Lieberman

“A market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products, with significant barriers to entry into the industry.”- Amosweb

“An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated” - Economicsonline 

“An oligopoly is a market dominated by a few large suppliers.”- Tutor2

Characteristics of an industry under Oligopoly

So how can you identify an oligopoly market structure? There are few significant indicators of an oligopolistic industry. The firms inside an oligopolistic industry are:

  • Significantly protected by new entrants
  • Produce most of the product/service volume
  • Highly sensitive to each others' product price-output decisions
  • Innovative

If you are in the USA and want to assess it by going beyond layman approach, or if the identification is a critical professional need. You may recognize oligopoly by checking the concentration ratios through the Herfindahl-Hirschman Index (HHI). An HHI above than 1,000 is usually an example of oligopoly, while the level below 1,000 is considered as monopolistic competition in the concerned industry.

The concentration ratio is actually, a comparison between the dollar value of total shipments in an industry and the given number of firms in it. The U.S. Census Bureau calculates concentration ratios for the few most significant companies from each respective industry. These firms are grouped by a predefined standardized industrial classification.

Managerial decisions in oligopoly

Market Structures

Marketing Market Structures

Define a market

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