The term oligopoly refers to an economic arrangement.
In this, a handful of companies control the entire marketplace.
They handle the manufacture and supply of a select good.
These are primarily the impact of economies of scale.
In many ways, these measures are used to tackle competition.
Based on the total number of players, it determines the market share.
The core concept is similar to monopoly.
The only difference is monopoly refers to one player; duopoly refers to 2 players.
But in case of oligopoly, there are more than two companies.
Though there is no upper limit, there can’t be too many either.
General perception indicates that this number has to be within a range.
It should be in a way that the action of one firm has to impact the other.
Only then, the actions will be conducted in a symbiotic fashion.
For example, if player A raises prices, player B and C need to be compelled to raise rates.
Only then, you will have a successful oligopoly in place.
Needless to mention that oligopolies are the outcome of economic manipulations.
As businesses grew, more than one player started dealing with the same business.
As a result, an urgent need to create a cartel-like arrangement was necessary.
The profit margins are undeniably higher in this case.
Compared to a competitive environment, the profit percentage is carefully calculated.
Oligopoly a Stable Alternative to Competition
Though a purely economic arrangement, an oligopoly is extremely stable.
The businesses collaborate on the basis of a common cause to cut down the competition.
So as a result of this arrangement, they extend benefits to each other.
So every member enjoys the benefit of a healthy collaboration.
However, the stability emerges from certain ethics in place too.
The members of an oligopoly avoid cheating each other.
They avoid any measure that can lead to a potential economic war.
The basic idea is to grow and let the select group of traders grow.
So territories, customer list and wages are all allocated and pre-decided.
Nobody steps into anyone’s territory, and there is well-allocated space for every member.
This is what creates the relative stability in this type of business arrangement.
As a result, you have governments across the world take up a stance against oligopolies.
So, there are laws against fixing the price and also any potential collusion.
But if you look at cartels, you can easily understand that these can exist despite Government sanctions.
For example, OPEC is one of the most prominent cartels in the current context.
In fact, businesses use many creative ways to avoid highlighting direct price fixing.
Often, it is camouflaged by creating price hikes in a phased manner.
Another convenient approach is letting the leader raise prices and then following.
However, the problem with price wars is they can be rather destructive.
As a result, oligopolies use options like branding, product differentiation and the like.
This also results in businesses experiencing a certain amount of stability.
It also helps businesses enhance market share too.
So they are able to grow their business, yet manage to maintain their individuality.
This is what makes businesses willing supporters of this arrangement.
Oligopolies Have to Satisfy Some Key Conditions
Typically oligopolies are created to root out the very stiff competition.
But there are many conditions which necessitate creation of oligopolies.
Sometimes businesses enter this type of arrangement to avoid high entry cost.
This arrangement may also cut down possible capital expenditure or other legal formalities.
Often, this kind of understanding helps number of players to coexist in a convenient manner.
Of course, technology and globalization have impacted the overall roadmap significantly.
In many ways, it has introduced a more level playing field.
It has also cut down the necessity and importance of oligopoly.
But that said, it is not hard to find oligopoly examples.
This is primarily because of the widespread economies of scale.
Of course, the manifestation of the oligopoly can be quite distinct.
On the whole, oligopolies often exist in slightly camouflaged variation.
Technology has also compelled businesses to undertake subtle variations.
This is primarily targeted towards improving both profitability and quality.
Needless to mention the oligopoly too is seeing a gradual evolution.
Key Features of Oligopoly
There are some unique features of an oligopoly.
1. Limited Sellers
There are just a few firms dominating the marketplace.
As a result, you do not have too many sellers in an oligopoly.
As a result, the firms that are operational enjoy considerable control on overall pricing trends.
2. Mutual Interdependence
This is another typical feature of an oligopoly.
Every seller is conscious of their interdependence.
They have to be cautious about undertaking any market changing development like price hikes or new launches.
If one firm makes a change, everyone else also has to follow suit.
3. Managing Advertisement
The mutually inter-dependent environment also produces different pressure points.
The advertisement is the only way to promote the product.
But if one firm does excessive promotion and others remain silent, customers often shift to the silent players.
So getting the ideal balance and converting to more buyers is crucial.
4. Dealing with Competition
This is rather intense, and each player observes the other with a hawk’s eye.
Be it a price hike or a promotional offer; it is always all for one or one for all.
You cannot look at any offer on a case-specific basis.
Every small and big development in weighed on the larger scale.
5. Entry Norms
Exiting the oligopoly and the specific sector is not difficult but what is challenging is, entering it.
Often there are specific norms for entering these firms.
These often act as barriers for new entrants.
In many ways, this also helps in limiting the total number of players.
6. No Uniformity
However, that said most oligopoly lack uniformity.
Some firms are huge, and some are small.
The operational market share of some is also very large.
In comparison, the others may have a minuscule part.
This also impacts the overall plan and counter plan.
Examples of Oligopoly
There are plenty oligopoly examples, the world over.
In fact, the current trend indicates that the number of these players is increasing.
Unlike a monopoly, this allows multiple players to coexist.
So instead of one corporate, you have a selection of companies dominating a sector.
These are prevalent across a wide cross-section of industries.
Wherever corporates benefit through cooperation, you see these economic adjustments.
Some common industries where you see a multitude of oligopoly includes
- Media industry
- Cable channels
- Pharma industry
- Wireless software firms
- Oil and gas sector
- Metal like Steel and Aluminum
- Mobile manufacturing
1. Oligopoly Examples in Media
Think about the media sector in the US.
Typically almost 90% of the industry is dominated by 5-6 key players.
While there are some other players too, they command the chunk of viewership.
These include the likes of
- Time Warner
- Murdoch’s NWSA
They command a significant say in terms of operating rates and usage terms.
Even when you see the overall content selection and prime-time programming, there is considerable unity.
In other words, when you have the same prime time on every channel, viewership will be spread out.
No particular player will be able to eke out an additional advantage.
At the same time, every player can look out for a share of the same viewer base.
In other words, the scalability of the TV channels will be limited to an extent.
But within that range, all of these players can co-exist with relative gains.
At least, here they will not face cut-throat competition or unmanageable resistance.
The relative cost of new foray also comes down as a result of this oligopoly.
2. Oligopoly Examples in Technology Sector
When you consider computer operating software, you have just two prominent names.
These are Apple and Windows.
For over a decade now, these two players have consistently managed the bulk of market share.
There is just another member in this oligopoly.
It is Linux Opensource.
But apart from these, there are hardly any players in this space.
Together they command almost the entire 100% of global market share.
You may be anywhere in the world, but if you own a computer, you use any of these.
It is because of two primary factors.
One is, of course, their established repertoire in this field.
The other is the lack of a player that can stand its own like these three.
Most other computer software providers are compatible to these three major players.
As a result, the dominance of these players continue.
So this oligopoly is almost self-sustaining.
On the one hand, it showcases the lack of competent opponents.
On the other hand, it also highlights the innovation strength of these three.
They have managed to create an eco-system that completely sustains their growth.
It helps them continue with the existing resources and keep adding to it.
Operating System for Smartphones
This is also another striking example of an extreme oligopoly in this segment.
When you consider operating systems for the smartphone, what company do you think about?
Almost invariably you consider the Android phones and the Apple iOS phones.
There is a small percentage of Windows phones too.
Amongst the three, Android is one of the most dominant players.
It is often seen as a dominant player in themed-pried phone segment.
The Apple iPhone is more of high-end customer product.
But now Apple phones are also targeting the mid-priced customer segment.
It is interesting; how these price points are being managed within the existing ecosystem.
There are set companies that liaison with select operating software.
So you have LG and Samsung typically manufacturing only Android phones.
Google also has its own phone using the Android software base.
However, Apple iOS operates only on Apple phones.
It is however seen as a premium brand with premium pricing.
The windows phones in comparison have a minuscule share in the whole game plan.
But at the end of the day, these three brands are coexisting in harmony.
There is no significant threat to their operation.
Moreover, you do not see any new player coming into the fray in near future.
3. Oligopoly Examples in Automobile Space
The trinity of GM, Ford and Chrysler hogged the limelight in terms of technological excellence.
For decades now, they have offered stiff competition to major players across the world as well.
When it came to US local markets, they fairly dominated the entire space.
Often referred to as the Big Three in US automobile markets, they held a unique position.
Through the 1950s and the 1960s, they single-handedly service automobile demand.
They also pocketed massive profit as is the case with these oligopolies.
The introduction of new models in US was affected by this.
There were clear signs of synchronized collusive action by these three participants.
One of the best examples is the introduction of small cars in the 1950s.
All of these three players undertook a united and well thought of strategy.
Even if you compare GM, Ford and Chrysler on the pricing front, you can mark the difference.
If you analyze the two, you will see two distinct teams in this oligopoly.
One of them was the price leader, and the other one was the follower.
The trend between 1960-late1970s indicates that Chrysler invariably announced the price rise first.
General Motor’s price hike followed Chrysler, but was less than Chrysler’s.
As a result, Chrysler then had to reduce its price to GM’s levels.
Ford followed their price movement.
They raised their prices, but it was only to the range that Ford raised.
As a result, the rules of the game were clearly set.
The price increase and introduction of new models all followed a specific trend.
However, this oligopoly has been blamed as the main cause of the downturn in US automobile space.
4. Oligopoly Examples in Pharma Sector
Not just the US but on a global basis, if you see, the pharma space is dominated by some key players.
They do not just lead the sector in terms of new drug innovations.
But at the same time, these firms wield unique pricing power in the pharmaceutical sector.
Often they are responsible for global discrepancies in pricing.
Sometimes, they can also be seen working together in times of health crisis globally.
The three companies I am referring to include Novartis, Merck and Pfizer.
The whopping expense involved in developing new drugs is one of the primary reasons for this arrangement.
The threat of competition is fairly limited in this pace.
Patents for every drug that are in circulation enable easy resolution of the issue.
These patents protect new products from potential competition.
Developing new drugs is a very expensive affair.
Often it can take close to$1 billion for a single endeavor.
After that, the US FDA takes a call on the viability.
Only when it passes that test, it can be mass produced.
So anyway, the number of new players in this space is reduced.
Moreover, the government grants to existing patent holders is also a key catalyst.
It provides them with an additional resource to invest further into drug development.
But this may not be possible by a new player.
Moreover, sustainability is also a key issue in oligopoly.
You have to understand a new entrant will take years before developing a drug.
But these three are established players with a long track record of success and grants.
As a result, they are able to cash in on their experience for future success in a comprehensive way.
The oligopoly here works in a symbiotic fashion.
The various examples of oligopoly highlight the different nuances.
This economic arrangement is primarily a means to get a level playing field.
But at the same time, an oligopoly is not conducive to healthy competition.
The fall of the US automobile companies is a burning example.
Here each player was so keen on pulling the other one down; they missed the innovation aspect.
As a result of that, they started begging from the government to avoid bankruptcy.
But there are some distinct advantages of an oligopoly too.
The trick is to identify the right example of oligopoly.
This will help you derive long-lasting lessons in excellence from oligopoly.
In many ways, oligopoly has addressed the mathematics of the economy of scale in the best possible way.