Oligopoly

Topics: Oligopoly, Monopoly, Competition Pages: 3 (724 words) Published: June 17, 2013
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DEFINITION
!   A situation in which a particular market is controlled by a small group of firms.

!   An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

The retail gas market is a good example of an oligopoly because a small number of firms control a large majority of the market.

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers. Alternatively, oligopolies can see fierce competition because competitors can realize large gains and losses at each other's expense. In such oligopolies, outcomes for consumers can often be favorable. Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there m u s t b e a c t u a l c o m m u n i c a t i o n b e t we e n companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an e f f i c i e n...
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