An oligopoly is a market characterized by a few sellers who produce or sell a specific product, thereby leading to a high level of market concentration. Often referred to as a “competition among the few” an oligopoly forms when a few companies dominate a particular market.
Companies that run within an oligopoly typically take advantage of their stature to increase their profitability, either through technological savvy, government mandate or non-competitive practices. As such, an oligopoly is best defined by the behavior or conduct of the companies operating within it.
To detect an oligopoly, simply check the concentration ratio that measures the extent to which a few leading companies dominate the market. The rule of thumb is that an oligopoly exists when the top 5 companies in the market account for over 60% of total market sales.
Features of an Oligopoly
Dominating companies within an oligopoly will typically have the following characteristics:
- Product Branding: Every company operating within an oligopoly sells a branded product. Dominant companies within an oligopoly tend to focus most of their efforts on building their brand identity and brand loyalty to cut down the rate of customers switching to competing brands. This is mainly because the costs of acquiring a new customer far outweigh those of selling more of their product to existing customers.
- Entry Barriers: Barriers to entry guarantee that the dominant companies enjoy above normal profits. While it is possible for many smaller companies to run on the periphery of an oligopolistic market, none is big enough to have any significant impact on output or prices. A typical barrier to entry is the staggering costs of developing and marketing new products due to patents taken out by dominant companies to protect their business from new competing products.
- Interdependent Decision Making: Because the dominating companies within an oligopoly are interdependent, they must factor in the likely reactions of their competitors to any changes in output, price or other forms of non-price competition.
- Non-Price Competition: Non-price competition is a consistent feature of the oligopolistic companies’ competitive strategies. Non-price completion involves strategies for advertising and marketing designed to develop brand loyalty and increase demand among consumers. The dominant companies prefer non-price competition over price competition due to the self-defeating nature of an all-out price war.
Examples of Oligopolies
In the United States, for instance, companies in the health insurance, pharmaceuticals and technology industries have successfully established oligopolies.
For instance, the growth of internet technologies has led to oligopolies forming from new high-tech markets. This is clear from the market dominance by companies that offer unique products boosted by an ecosystem of supporting technologies. In 2015, Apple’s Mac OS, Microsoft’s Windows and the open source Linux operating system dominate the computer operating systems’ market.
Because of their established positions, these 3 technology companies control almost 100% of the market for computer operating systems. All other providers of software create programs that are compatible with these operating systems, thereby further reinforcing these key players’ dominance.