Strategy for Information Markets/Background/Oligopoly
An oligopoly is very similar to a monopoly in a sense where one company dominates the market but in this case there are at least two firms dominating the market. These firms are able to influence the price for a product in the market. A key component to an oligopoly is interdependence between the few firms which means that each firm must take into consideration reactions of the other firms in the market when the firm decides on a price. The products that the oligopolistic firms produce are typically very similar and are competing for market share. These companies don't have complete control since there are more than one firm with market power.
The word "oligopoly" comes from two Greek words: oligo, meaning "few," and polein, "sellers."
A Concentration Ratio is a tool used to illustrate total output produced in a certain industry by a given number of firms. Oligopolies can be discovered using concentration ratios because it measures the total market share dictated by the certain amount of firms. When a high concentration ratio is present in an industry, it can be identified the industry as an oligopoly.
Examples of Oligopolies
- Cell Phone Companies: AT&T, Sprint, Verizon, T-Mobile
- Laundry Detergent: Tide, Arm & Hammer, All, Cheer
Barriers To Entry
Oligopolies tend to continuously dominate the market because it can be costly or difficult for potential rivals to enter the industry. These high start up costs can be too expensive and the company is at risk due to the uncertainty for success. Paying for high start up costs will put a company in the negatives and can cause a company to become bankrupt.
In 1838 the first solution to oligopolistic interdependence is associated with Antoine Augustin Cournot who was a French economist as well as a mathematician. Even though most theories only applied to two firms he always emphasized his analysis to three or more. He resolved this problem by suggesting that firms strive to maximize their profits under the assumption that its rivals’ outputs were constant. Each oligopoly firm will supply that remaining share to maximize profits. Cournot’s wanted to provide his awareness of the interdependence between the oligopolists and he also made demand curves to illustrate the market's reaction.