Oligopolistic Competition: Definition and Characteristics
Oligopolistic competition is a market structure in which a small number of sellers dominate the market. These sellers offer products that are differentiated but not to a great extent (Monash Business School, 2023). Each seller holds a significant market share and must consider the actions of its competitors (Monash Business School, 2023).
Number of Firms
The number of firms in an oligopoly is limited, but there is no precise upper limit (Investopedia, 2023). However, the number must be low enough that the actions of one firm significantly influence the others (Investopedia, 2023).
Market Power
Oligopolistic firms possess substantial market power due to their dominance in the market (Monash Business School, 2023). They can influence prices, output levels, and other market variables (Monash Business School, 2023).
Interdependence
A key characteristic of oligopolistic competition is the interdependence among firms (Monash Business School, 2023). Each firm’s actions directly impact the other firms in the market (Monash Business School, 2023). Therefore, firms in an oligopoly must consider the reactions and strategies of their competitors (Monash Business School, 2023).
Barriers to Entry
Oligopolies often have high barriers to entry, making it difficult for new firms to enter the market (Monash Business School, 2023). These barriers can include economies of scale, regulatory barriers, access to distribution channels, and brand loyalty (Monash Business School, 2023).
Collusion and Competition
Oligopolistic firms may engage in collusion, where they cooperate to restrict output and/or fix prices to achieve above-normal market returns (Monash Business School, 2023). However, collusion is often difficult to maintain due to the incentive for each firm to cheat and gain a competitive advantage (Monash Business School, 2023). This dilemma is known as the prisoner’s dilemma (Monash Business School, 2023).
Conclusion
Oligopolistic competition is a market structure characterized by a small number of dominant sellers, differentiated products, high market power, interdependence, barriers to entry, and the potential for collusion. Understanding the dynamics of oligopolistic competition is crucial for policymakers, industry analysts, and business strategists.
References
- Monash Business School. (2023). Oligopolistic Competition. Retrieved from https://www.monash.edu/business/marketing/marketing-dictionary/o/oligopolistic-competition
- Investopedia. (2023). Oligopoly: Meaning and Characteristics in a Market. Retrieved from https://www.investopedia.com/terms/o/oligopoly.asp
- St. Louis Fed. (2023). What Makes a Market an Oligopoly? Retrieved from https://www.stlouisfed.org/open-vault/2023/may/what-makes-a-market-an-oligopoly
FAQs
What is oligopolistic competition?
Oligopolistic competition is a market structure in which a small number of sellers dominate the market and offer differentiated products.
What are the characteristics of oligopolistic competition?
Oligopolistic competition is characterized by a small number of dominant sellers, differentiated products, high market power, interdependence, barriers to entry, and the potential for collusion.
What are the advantages of oligopolistic competition?
Oligopolistic competition can lead to economies of scale, product differentiation, and innovation.
What are the disadvantages of oligopolistic competition?
Oligopolistic competition can lead to higher prices, reduced consumer choice, and barriers to entry for new firms.
What are some examples of oligopolistic competition?
Examples of oligopolistic competition include the automobile industry, the telecommunications industry, and the pharmaceutical industry.
How does oligopolistic competition differ from monopoly?
In a monopoly, there is only one seller, while in oligopolistic competition, there are a small number of sellers.
How does oligopolistic competition differ from perfect competition?
In perfect competition, there are many sellers and buyers, and products are homogeneous. In oligopolistic competition, there are a small number of sellers and differentiated products.