What is oligopoly- Everything you need to know!

Markets with oligopolies are those in which a relatively small number of vendors provide services to a large number of customers. Oligopoly is a sort of imperfectly competitive market structure characterized by the dominance of a relatively small number of enterprises.

For example, producers of passenger airplanes, such as Boeing or Airbus, and automobile manufacturers, such as Mercedes and BMW, are examples of oligopolies. Oligopolies are frequently formed by chance when businesses expand and begin to gain more and more market share, eventually displacing or absorbing competitors. A few major organizations come to dominate a market when the number of enterprises offering certain products and services continues to shrink over time. 

Customers, in turn, are more likely to place their faith in more prominent and recognized companies when making product purchases. In an oligopoly that has been established, the dominant corporations have a great deal of freedom and can afford to entirely control prices. As an example, many mobile phone businesses, just because they are popular and can afford to do so, drastically raise the price of their products.

The most important characteristics of an oligopoly!

Oligopolies are markets in which there are only a small number of enterprises competing against each other. Oligopolies are defined as monopolies that control the majority of the market share in a certain industry. The oligopoly's offerings are either identical to competitors' products (like mobile communications) or differentiated (for example, washing powders).

However, in oligopolistic marketplaces, price competition is extremely unusual, if not nonexistent. Generally speaking, it is extremely difficult for new enterprises to break into an oligopolistic market. The impediments are either legislative constraints or the requirement for a significant amount of early money. As a result, large corporations are an example of an oligopoly.

As a result, oligopolistic marketplaces exhibit the features listed below:

1. A limited number of enterprises competing against a big number of buyers

This indicates that the market supply is concentrated in the hands of a small number of major corporations that sell the product to a huge number of small purchasers.

2. Differentiated or standardized products

The decisions of oligopolists regarding production quantities and pricing are interconnected, i.e., oligopolies replicate one another in all aspects of their operations. As a result, if one oligopolist decreases prices, it is almost certain that others will follow his lead. However, if one oligopolist raises prices, others may be reluctant to follow suit since they may lose market share as a result.

3. The presence of large hurdles to entrance into the market, i.e., high barriers to entry into the market

Price restrictions are restricted in this business because enterprises in the industry are aware of their interdependence.

4. Price policy

The interaction between dominant corporations and their competitors in terms of pricing strategy is one of the most important variables impacting the dominant companies on the market as a whole.

A firm's decision to raise the pricing of its goods and services is generally not lucrative since it is probable that other enterprises will not follow the first one, and consumers would "pass" to a competitor company.

Whenever a corporation lowers its product pricing, rivals frequently follow suit in order to avoid losing clients, lowering the cost of their own items as well: this is called a "race to the top." A firm's pricing should be reduced or new services and items should be offered to rivals. Otherwise, if they do not give clients a viable alternative, they risk losing those customers permanently.

Price wars between oligopolists, in which companies establish their own prices for their goods that are no higher than those of a major rival, are common among firms in this situation.

Oligopolies are classified according to their types and structural characteristics!

Oligopolies can be divided into the following categories:

• When businesses manufacture homogeneous products (cement, steel, oil, gas, etc.), this is referred to as pure oligopoly.
• A differentiated oligopoly is a scenario in which businesses create items that are comparable to one another (cars, aircraft, phones, computers, cigarettes, beverages, and so on).
• A collective oligopoly is formed when a group of businesses bands together to control the price or quantity of a certain commodity. A structure like this exhibits symptoms of cooperation as well as market monopolization.

The Different Oligopoly Models!

In practice, there are several types of oligopoly models that may be distinguished:

• price (volume) leadership model;
• cartel model;
• Bertrand model (price war model);
• Cournot model.

1. Price (Volume) Leadership Model

One company usually stands out from the rest, and this company eventually becomes the market leader in its field. The reason for this is due to factors such as the length of their existence (authority), the presence of more professional employees, the presence of scientific departments and the newest technology, as well as their larger market share. 

The leader is the one who is the first to alter the price or output of a product. At the same time, the activities of the leader are repeated by the rest of the companies. Because of this, there is a sense of coherence in the acts taken by everyone. The company's top executive should be well-versed in the dynamics of product demand in the sector, as well as in the capabilities of its rivals, to ensure success.

2. Cartel model

Collaboration with rivals' overproduction pricing and output quantities is the most effective technique for an oligopoly to achieve maximum profits. Collusion makes it possible to increase the power of each of the firms and to use the opportunities for obtaining economic profits in such an amount that a monopoly would receive it if the market were a monopoly. In economics, this type of collaboration is referred to as a cartel.

3. Bertrand model (price war model)

It is considered that each company wishes to become even larger and, ideally, to capture the whole market. When one of the enterprises begins to decrease the price in order to drive away competition, the other firm follows suit. Other companies are compelled to follow suit in order to avoid losing their market capitalization. 

The pricing war will continue until there is only one company remaining in the marketplace. The remainder of the companies is closed.

4. Cournot model

Independent projections of market developments are used to determine how corporations would behave in a given situation. Each company analyses the activities of rivals and determines a volume of production and a price that will allow it to maintain its competitive position in the market. 

If the original calculations are incorrect, the company makes adjustments to the parameters that were chosen. After a given amount of time, the shares of each company on the stock market stable and do not fluctuate in the future as a result of the market.