Oligopoly (Meaning and Explanation)

We explain what an oligopoly is in economics, its types, characteristics and examples. Also, differences with a monopoly.

oil oligopoly — In an oligopoly, like oil, small producers cannot compete.

What is an oligopoly?

An oligopoly (composed of Greek voices oligos“few”, and pollin“sell”) is the economic situation in which a market is strongly influenced by a small set of producers or sellers, without any completely dominating over the others, but without allowing free competition from other small or medium producers.

The latter is due to the fact that, in oligopolies, the commercial rules are managed in favor of the most powerful actors, making it difficult to incorporate new competitors, but at the same time preventing any of the powerful ones from completely taking control of the market. , which would lead to a monopoly.

These types of conditions have their own market logic, which usually lead to a reduction in supply and higher prices in the event of collusion or market participation, for example. However, its economic results can be very diverse: it is possible that in situations of open competitiveness, with low prices and high levels of production, an oligopoly comes close to free or perfect competition.

There are no economic theories to describe the behavior of oligopolies, but rather a set of situational models, based on real life, that allow possible projections regarding their results. For this, Game Theory is usually useful.

Characteristics of oligopolies

Oligopolies are characterized, broadly speaking, by the following:

They are market forms in which few companies (usually a maximum of four) compete for the market influencing in its favor the conditions of incorporation into it.
In oligopolistic situations, It is the producers who set the prices instead of being the ones who take them. Furthermore, in these situations your profits are normally maximized.
In the long term, oligopolies can promote significant growth for influential companies which can be to the detriment of the consuming public (high prices) or to their benefit (low prices). Everything will depend on the competitiveness schemes that are established, which may revolve around price, advertising, consumer loyalty, etc.
Its distinctive feature is the interdependence between oligopolistic firms since their actions inevitably affect the market and others, so they are all very aware of every step they take. That turns the oligopoly into a chess board, where for every move of one company there is a response from another.

Types of oligopoly

A demand oligopoly occurs when there are very few buyers for a product.

The following forms of oligopoly are generally distinguished:

Bilateral oligopoly In this type of situation, there are not only few suppliers in the market, but also a small audience for which they must compete, that is, few companies and few consumers.
Demand oligopoly Also called oligopsony, it consists of the inverted version of oligopoly: there are many suppliers and few demanders, so that it is the consumers who exert influence on the market.
Duopoly These are oligopolies of only two competing companies, so they constitute an intermediate step between oligopoly and monopoly.

Examples of oligopoly

telephone oligopoly — 4 companies control 97% of the US mobile phone market.

Some examples of oligopoly are the following:

The American cell phone market. Dominated by four large telecommunications corporations: Verizon Wireless, AT&T, Sprint and T-mobile, which control 97% of the market.
The sale of oil from OPEC countries That is, the Organization of Petroleum Exporting Countries operates under oligopolistic or cartel rules, since these 14 nations bring together 43% of world production and 81% of the world's oil reserves.
The large fuel distributors in Spain. Like Repsol, Campsa, Petronor and a few transnational companies, they manage the bulk of the market and make it difficult for competing companies to emerge.
The few airlines that still fly to Venezuela Since their economic debacle at the beginning of the 21st century, they manage the entire aeronautical market to and from this Caribbean country, although they do so under unusual economic conditions. These companies are Avianca, Avior, Copa, Iberia, LATAM, Air France, Turkish Airlines and Wingo.

Oligopoly and monopoly

Unlike oligopoly, in which there is a margin – fair or not – for commercial competition, the case of monopoly is much more drastic, since A single company is the one that no longer exercises influence, but total control over the market.