Economic condition

An oligopoly is an economic condition in which only a few firms hold strategic control over the market for particular goods and/or services. The increased concentration of strategic control among the participants of an oligopolistic market is derived directly from the reduced number of competitors within it. Oligopolies lie somewhere between the spectrum of perfect competition, where multiple players define the market, and monopolies, where a single firm dominates it.

As mentioned above, there is a greater concentration of strategic control among the individual participating firms of an oligopoly. This is not ipso facto a condition derived from the reduced number of participants itself, but a result of the reduced level of competition that arises from it. Because strategic control is concentrated across fewer firms, there is a sense of self-awareness that dictates their decisions. Decisions made by one oligopolist are not only influenced by the decisions of other firms, but they also take into account the reactions of other firms.

This makes it more likely for oligopolies to engage in market collusion. The primary reasons why oligopolies occur is to some extent, bound by the barriers to entry that are erected which limit the ability of potential competitors to enter the market: First, some firms may expand their production or services to such a large scale, that it becomes a natural entry barrier. In effect, it becomes difficult for competition to emerge because it would require them to match that scale in order to be effectively competitive.

For example, if one firm can successfully expand the manufacture of one good to such an extent that they can bring down their retail price, competing manufacturers must either successfully match this scale economy or add value to the good in order to justify its price to the market. Second, government may play a role in the emergence of an oligopolistic market. Through regulatory measures such as patents, business licenses and market restrictions, the government can influence the extent to which oligopolies have control over the market.

One good example of how the government can get influence competition is the Federal Communications Commission or FCC. For example, in the 1930s, the FCC assigned broadcast spectrum in a manner that effectively crippled the ability of FM radio to compete with AM radio. In effect, this ensured that AM stations a guaranteed hegemony and oligopoly on the broadcast radio market. As such, the FCC’s involvement radically shaped the broadcast radio market and continues to maintain its influence in other communications oriented markets such as telephony, the Internet and television.

Third, the costs of advertising may act as a barrier to market entry. Any product or service is to a significant extent, dependent on a successful marketing campaign. Although the 21st century and New Media has radically changed the landscape of marketing, this truism still holds true: without the benefit of word of mouth, firms must rely on strong and well-funded advertising campaigns in order to get their goods and services the kind of attention that the existing oligopolists already possess within the market.

For example, in the motion picture business, it is difficult for any new film to carve a spot in the attention of moviegoers’ without the advertising commitment of a well-funded distributor. While there are many alternative channels for marketing, a film’s ability to succeed at the box office requires establishing a compelling product identity for itself to set it apart from its more well-advertised peers. Regardless of the reasons behind their emergence, an oligopoly is cause for concern in the market due to their potentially detrimental effects on market economies.

While a monopoly sees a market experiencing complete control and domination by a single form, a monopoly inevitably risks the ire of the government. As it stands, a pure monopoly in any market today is almost nonexistent. An oligopoly, on the other hand, is far more disconcerting as the collusion between individual firms creates the illusion of competition, while allowing the participating firms to conspire to control the market at the expense of consumers and industries.

For example, the influential 18th century economist Adam Smith noted that while “People of the same trade seldom meet together,” the result of such meetings usually “ends in a conspiracy against the public […] to raise prices. ” Such potential for collusion means that in an oligopoly, the increased concentration of market control means that instead of competing with one another they can conspire to increase the prices, leaving markets helpless to such price changes.

For example, if the market control for paper products was concentrated across only two manufacturers, resulting in an oligopoly known as a duopoly, choose to double the price of their products, consumers and business would have no choice unless a competitor can successfully emerge to compete with this price increase. As such, for oligopolistic collusion to be successful, the participating firms must find a means to punish competing firms that do not comply with this “agreement,” as well as fortify the barriers to entry to guarantee that new competitors do not arise.