Oligopoly

Oligopoly is a market structure characterized by a small number of large firms that collectively dominate an industry, creating interdependence where each firm's decisions significantly affect competitors and must account for likely competitive responses (Stigler G.J. 1964, p.44)^[1]. Three airlines control 80% of domestic routes. Four wireless carriers serve 95% of mobile subscribers. Two companies dominate the soft drink market. In each case, a handful of giants compete intensely while effectively excluding new entrants—the defining characteristic of oligopoly.

The term derives from Greek: "oligos" (few) and "polein" (to sell). Oligopolies occupy the middle ground between perfect competition (many small sellers) and monopoly (one seller). Unlike monopolists, oligopolists cannot ignore competitors. Unlike competitive firms, they have significant market power. This creates strategic complexity—every major decision must anticipate rival reactions.

Characteristics

Oligopolies share defining features:

Few dominant firms

Concentration. A small number of large firms account for most industry sales. Four-firm concentration ratios often exceed 60-80% in oligopolistic industries^[2].

Market power. Each firm is large enough that its actions affect market prices and competitors' profits.

High barriers to entry

Protection from competition. Barriers prevent new firms from eroding profits: economies of scale, capital requirements, patents, brand advantages, or government licenses.

Persistent concentration. Oligopoly structures tend to persist because new entrants face prohibitive obstacles^[3].

Interdependence

Strategic interaction. Each firm's optimal decision depends on what competitors do. Price cuts may trigger wars; price increases may be matched or undercut.

Game theory. Economists use game theory to model oligopolistic competition, analyzing strategic moves and countermoves.

Non-price competition

Rivalry without price wars. Oligopolists often compete through advertising, product differentiation, and service rather than price, avoiding mutually destructive price competition^[4].

Types

Oligopolies vary in behavior:

Pure oligopoly

Homogeneous products. Firms sell identical products—steel, cement, chemicals. Competition focuses on price and service.

Differentiated oligopoly

Branded products. Firms sell similar but not identical products—automobiles, smartphones, airlines. Product differences create some pricing power^[5].

Collusive oligopoly

Coordinated behavior. Firms explicitly or tacitly coordinate prices and output, approaching monopoly outcomes. Explicit collusion (cartels) is usually illegal.

Competitive oligopoly

Rivalry. Firms compete aggressively despite interdependence, producing outcomes closer to competition.

Pricing behavior

Oligopoly pricing exhibits distinctive patterns:

Price rigidity. Prices tend to be stable because firms fear triggering price wars. The "kinked demand curve" theory suggests firms match price cuts but ignore price increases.

Price leadership. One firm (often the largest) sets prices that others follow, enabling coordination without explicit agreement^[6].

Non-price competition. Rather than cutting prices, firms compete through advertising, features, and service.

Economic effects

Oligopoly produces mixed outcomes:

Compared to competition

Higher prices. Oligopolists typically charge more than competitive firms would.

Lower output. Restriction of supply enables higher prices.

Economic inefficiency. Resources are not allocated optimally from society's perspective.

Compared to monopoly

Lower prices. Competition among oligopolists restrains pricing below monopoly levels^[7].

More innovation. Competition drives product improvement.

Potential benefits

Economies of scale. Large firms achieve efficiencies impossible for smaller competitors.

R&D investment. Profits and scale enable substantial research and development spending.

Examples

Common oligopolistic industries:

Airlines. A few major carriers dominate most national markets.

Telecommunications. Mobile and broadband markets typically feature 3-5 major providers^[8].

Automobiles. Major global markets are served by a handful of large manufacturers.

Technology platforms. Search, social media, and cloud computing exhibit strong oligopolistic characteristics.

Beer and soft drinks. Global beverage markets are dominated by a few multinationals.

Oligopoly — recommended articles

Market structure — Monopoly — Perfect competition — Monopolistic competition

References

• Stigler G.J. (1964), A Theory of Oligopoly, Journal of Political Economy, 72(1), pp.44-61.
• Tirole J. (1988), The Theory of Industrial Organization, MIT Press.
• Viscusi W.K., Harrington J.E., Vernon J.M. (2005), Economics of Regulation and Antitrust, 4th Edition, MIT Press.
• Federal Reserve Bank of St. Louis (2023), What Makes a Market an Oligopoly?.

Footnotes

1. ↑ Stigler G.J. (1964), Theory of Oligopoly, p.44
2. ↑ Tirole J. (1988), Industrial Organization, pp.205-218
3. ↑ Viscusi W.K. et al. (2005), Regulation and Antitrust, pp.89-104
4. ↑ Federal Reserve Bank of St. Louis (2023), Oligopoly
5. ↑ Stigler G.J. (1964), Theory of Oligopoly, pp.48-52
6. ↑ Tirole J. (1988), Industrial Organization, pp.234-248
7. ↑ Viscusi W.K. et al. (2005), Regulation and Antitrust, pp.156-172
8. ↑ Federal Reserve Bank of St. Louis (2023), Examples

Author: Sławomir Wawak