Ranging from perfect competition to monopolies, market structures come in many different forms. Oligopolies are another form where only a few firms control the market. Some prominent examples of oligopolies are the steel industry and oil companies. In a nutshell, these producers can control output
or fix prices so they achieve higher returns than normal. Due to the very nature of an oligopoly, there are many barriers for the entry of new competitors, including economies of scale, accessing suppliers or distribution channels and brand loyalty. Hence, oligopolies tend to block new firms from entering and may keep prices high, which is not the best for customers.
What are the characteristics of oligopolies? Firstly, the firms are interdependent. There are only a few firms with similar market shares, so one firm’s actions have an influence on the other firms. Because of this, there tends to be a lot of product differentiation between firms. As already mentioned above, there are high barriers to entry - this is the second characteristic. These include patents, costly advertising and setting prices which are difficult for new firms to sustain. Lastly, oligopolies set prices instead of letting free market forces (supply and demand) determine them. This is done either as a cartel or by recognising a price leader whom the other businesses will follow.
Just like all the other market structures, oligopolies too have an impact on a country’s economy. First, let us consider the positive impacts of oligopolies. Oligopoly markets tend to be relatively stable as large firms are able to control the market forces. The firms in an oligopolistic market may experience higher profits, which can be spent on research and development towards products. As a result, consumers benefit from improved and innovative products, and sometimes technologies too. As the major market
share holders are large firms, oligopolies have high opportunities for economies of scale. This can drive down production costs, which may result in lower prices for consumers.
However, oligopolies also have many negative impacts on the economy. Although lower prices may be possible, high prices are set in order to maximize profits, which can be damaging to consumers and especially exploitative towards lower income consumers. Collusions may occur between firms in order to fix prices, thus they become anti-competitive, harming the market and reducing social welfare. Additionally, consumer choices are highly limited in oligopolistic markets, owing to the high barriers to entry of new firms. Lastly, they may under-provide quality to consumers as they have the opportunity to make high profits. Hence, technological or product innovations may be constrained.
In conclusion, oligopolies provide as many benefits as problems to the economy of a country. As long as oligopolistic markets do not end up in price wars, or keep prices too high, they tend to be beneficial to the consumers and gain benefits as a firm.
Akshara A
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