An oligopoly is a market structure in which a small number of large firms dominate the industry and collectively influence prices, output, and market behaviour. Unlike perfect competition - where firms act independently - firms in an oligopoly are highly interdependent, meaning that the actions of one firm directly affect the strategies and outcomes of others. This interdependence often leads to strategic behaviour, such as price matching, non-price competition, and in some cases, tacit or explicit collusion.
Oligopolies are common in industries requiring substantial capital investment, advanced technology, or large economies of scale, all of which naturally limit the number of market participants.
Key Characteristics of an Oligopoly
1. Few Dominant Sellers
The market is controlled by a small number of large firms. Because these firms hold a significant share of the market, competition is limited, and each firm’s decisions meaningfully influence market conditions.
2. Similar or Differentiated Products
Oligopolistic firms may sell:
- Homogeneous products, such as steel, oil, or cement
- Differentiated products, such as branded cars, mobile phone services, or airline offerings
Regardless of the degree of differentiation, products are generally close substitutes, giving consumers some ability to switch between providers.
3. Interdependence and Strategic Behaviour
Firms constantly monitor and react to each other’s actions. Pricing decisions, advertising campaigns, product launches, and changes in output must all consider potential competitor responses. This dynamic can result in:
- Price rigidity, where firms avoid price wars
- Game-theory-style behaviour, anticipating rival reactions
- Tacit or explicit collusion, where firms coordinate prices or output to maximise joint profits
4. Barriers to Entry
Oligopolistic markets typically feature high barriers to entry, such as:
- High start-up and capital costs
- Strong brand loyalty
- Control over distribution channels
- Patents and technological advantages
These barriers protect existing firms and reduce the likelihood of new entrants.
5. Some Degree of Market Power
Each firm has influence over price and output, though not to the extent seen in monopolies. Market power is shared among the dominant firms, creating a balance where no firm can act entirely independently.
Examples of Oligopolies
Oligopolistic markets can be found in many sectors worldwide, including:
- Automobile manufacturing – dominated by a handful of global brands
- Telecommunications – major providers control network infrastructure
- Airline industries – a few carriers typically dominate domestic and international routes
- Energy suppliers – gas and oil markets often feature a limited number of dominant firms
These industries illustrate how limited competition and high entry barriers shape market behaviour and consumer choice.
