One of the terms within the economy that must best be understood is that of oligopoly, since it can help you understand what is related to a market. If you are also immersed in a business, this concept is very important to you, especially if you are weighing ideas about what to do.
If you want to know what is an oligopoly, what characteristics it has, examples of oligopoly and other concepts related to it, here we have prepared a summary so that you have a first approach to all this.
What is an oligopoly
The first thing you need to do is understand what we mean by oligopoly. It's about a type of market in which sellers or products are very few, far fewer than consumers and demanders.
These sellers or producers are called 'bidders'; meanwhile, consumers or buyers would be the 'plaintiffs'. We can consider the same with competitors, who in this case would also be few.
What would this system entail? Well, the bidders, being few, and the demand is high, have a certain capacity to influence what the product they make is going to be worth. In other words, they are the ones who control the price and quantity of products that are put on the market. With higher demand, the price is more expensive because it is known that there will be people capable of buying it because it is something they want / need.
As there are few sellers or producers, it is understood that they will act in good faith. In fact, when it is known that there is manipulation by some oligopoly company, it is normal for the others to retaliate against the other. And it is that, although they are competitors among themselves, being such a small market, the profits can be high and there is something similar to an unwritten rule in which everyone benefits (something else is what happens in reality).
The way to distinguish the products between competitors is, above all, with the quality and the differentiation between them. They do the same, since they operate in the same market, but each in its own way.
Oligopoly and monopoly
Many times, these two terms are confused with each other. They are two different topics, and also with different characteristics, that you must take into account. To make it easier to understand:
- An oligopoly is a market in which there are few suppliers (companies) with very homogeneous, although there may also be differentiated. You have some control over the price (if not everything). An example? For example, the manufacture of vehicles. There are many companies but all of them are in an oligopoly so as not to compete with each other and produce homogeneous products even if there are some differentiated ones).
- A monopoly is a market in which there is only one supplier (company) and there are no products to replace those sold by that company. In this way, the price is completely controlled by the company, which is the one who decides how much to buy. An example of this is drinking water services.
Oligopoly characteristics
After all that we have discussed, it is clear that the oligopoly has certain peculiarities that you must take into account (and that help you distinguish it from other figures). These are:
- The fact that there is a small number of sellers. This allows you to set the price and the quantity that is sold.
- Have a homogeneous product among all. That is, similar products between all companies, in such a way that it does not matter whether it is bought from one or the other because it is the same product. The only thing is that it will be done in a certain way.
- Have independence between companies, but they do have agreements between them to have a good business relationship. In this case, the agreements can be non-collusive (so as not to compete with each other and carry out strategic positions that do not harm others), or collusive (when there are agreements regarding prices, quantity and distribution of the market in which they operate) .
- There are barriers to entry. Being limited to a small number, those companies that want to do the same thing are held back by this "coalition" to prevent the "business" from getting bigger.
Why are entry barriers
As we have said before, one of the characteristics of oligopolies is that they have barriers. These serve so that other companies cannot enter your market, since, if they do, they may not respect the agreements they have. Or even worse, compete with them and end up having to share the benefits among more companies (with which they touch less each one).
But in reality there are several causes of oligopoly, focusing on those barriers, which are:
- Scale economics. This is because the number of companies that are part of that market is limited. Why? Well, because if there are too many, it would no longer be an oligopoly as the number of suppliers is balanced with the number of demanders, and that would harm pricing, earning profits, etc.
- Reputation. It is a very important factor for these companies because when they are few, they all maintain a very high reputation. When new companies want to enter, that reputation and brand that have been created can affect, positively or negatively, but it will have repercussions and that is why many prefer not to risk losing what they have already gained.
- Legal barriers. Regarding copyrights, patents, etc.
- Strategic barriers. If these companies have agreements with clients, and new ones enter the market, it can cause those agreements to end up being broken, or to be concluded with other companies, thereby losing part of their strength as an oligopoly.
Examples
As we know that it is sometimes difficult to understand the concept well, here are some examples of oligopoly.
- Car manufacturing: car brands work under an oligopoly, as we have mentioned before.
- Chemical products: We are talking about the manufacture of chemicals. They are all the same, only the brand that sells them changes. In fact, there are products with differences, of course, but many times the base is similar.
- Fuel distributors: Such as Repsol, Campsa, Petronor ... All of them are the ones that "govern" the market, and that is the reason why hardly any new companies arise that want / can do the same thing.