Oligopoly Market Structure
Market structure refers to:
• Nature and degree of competition within a particular market
• The number of firms producing identical products which are homogenous
Oligopoly:
This is a market structure in which the market is dominated by a small number of firms that together control the majority of the market share. Few firms dominate
Although only a few firms dominate, it is possible that many small firms may also operate in the market e.g. the major airlines.
It is a situation between perfect competition and monopoly. When there are only two firms in the market the situation is known as duopoly
Example (hypothetical): a market has the below players;
A-56, B-43, C-22, D-12, E-3 & F-1
The three firms dominate this market with a concentration ratio of 88.3% i.e. 121/137 X100%
Oligopoly may exist due to the following reasons:
1. One important factor of production may be owned by a few firms only
2. Existing firms in an industry may find it advantageous to merge or consolidate themselves in order to eliminate competition
3. A few firms in some cases obtain a dominant advantage of product differentiation
Features of oligopoly
• Firms are price takers – price are determined by the interaction of demand and supply and based on this the producers decide which goods to produce
• Few but large firms exist
• There are close substitutes
• Non- price competition exist like the form of product differentiation
• Super normal profits are earned both in the short run and long run
Few sellers- hence decisions are mutually interdependent and can’t ignore each other because the actions of one will affect the others.
Characteristics of an oligopoly
An oligopoly usually exhibits the following features:
• Product branding: Each firm in the market is selling a branded product.
• Entry barriers: Entry barriers maintain supernormal profits for the dominant firms. It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none
• Nature and degree of competition within a particular market
• The number of firms producing identical products which are homogenous
Oligopoly:
This is a market structure in which the market is dominated by a small number of firms that together control the majority of the market share. Few firms dominate
Although only a few firms dominate, it is possible that many small firms may also operate in the market e.g. the major airlines.
It is a situation between perfect competition and monopoly. When there are only two firms in the market the situation is known as duopoly
Example (hypothetical): a market has the below players;
A-56, B-43, C-22, D-12, E-3 & F-1
The three firms dominate this market with a concentration ratio of 88.3% i.e. 121/137 X100%
Oligopoly may exist due to the following reasons:
1. One important factor of production may be owned by a few firms only
2. Existing firms in an industry may find it advantageous to merge or consolidate themselves in order to eliminate competition
3. A few firms in some cases obtain a dominant advantage of product differentiation
Features of oligopoly
• Firms are price takers – price are determined by the interaction of demand and supply and based on this the producers decide which goods to produce
• Few but large firms exist
• There are close substitutes
• Non- price competition exist like the form of product differentiation
• Super normal profits are earned both in the short run and long run
Few sellers- hence decisions are mutually interdependent and can’t ignore each other because the actions of one will affect the others.
Characteristics of an oligopoly
An oligopoly usually exhibits the following features:
• Product branding: Each firm in the market is selling a branded product.
• Entry barriers: Entry barriers maintain supernormal profits for the dominant firms. It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none
References: 1. Singh D. K. (2003): Elements of Economics, Shiva Offset Press India 2. Slavin S. L. (1996): Economics, McGraw Hill Ltd, 4th Edition 3. Saleemi N. A. (2010): Economics simplified, ACME Press Kenya Ltd, 4th Edition 4. http:// www.tutor2u.net/blog/index.php/economics/c187 5. http:// www.yourdictionary.com/oligopoly