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In this article we will  learn about “OLIGOPOLY”. An oligopoly is a market structure with a small number of firms, none of which can prevent others from having significant influence. The concentration index measures the market share of the largest companies. Bookmark this article for future use.

A monopoly is a market in which there is only one producer, a monopoly consists of two companies, and an oligopoly consists of two or more companies. There is no upper limit on the number of oligopoly firms, but their number should be so small that the effect of the work done by them should significantly affect others.

Key Findings : 

The term “oligopoly” refers to a small number of producers who are working, either explicitly or quietly, to restrict production and/or fix prices, to obtain higher-than-normal market returns. Economic, legal, and technical factors can contribute to the formation and maintenance, or dissolution, of the oligopoly.
The biggest difficulty faced by the oligarchs is the prisoner’s dilemma faced by each member, which encourages each member to cheat.
Government policy can discourage or encourage oligopolistic behavior, and companies in mixed economies often seek government approval to limit competition.

Reach the Depth of Oligopoly :

The oligarchs of history have included steelmakers, oil companies, railroads, tire manufacturers, grocery store chains, and wireless carriers. The economic and legal concern is that an oligopoly can lock out new entrants, stifle innovation and drive up prices, all of which harm consumers.

Firms in an oligopoly set prices, either collectively (in a cartel) or under the direction of a single firm, rather than taking prices from the market. Thus, the profit margin is higher than in a more competitive market.

Terms that Allow Oligopoly :

The conditions that allow oligarchs to exist include high entry costs for capital expenditures, legal privileges (licenses to use the land for wireless spectrum or railways), and a platform that will create value with more customers (such as social networks). 

Global technological and commercial changes have changed some of these situations: offshore production and the rise of “mini-mills” have affected the steel industry, for example. In the office software applications space, Microsoft was targeted by Google Docs, which was funded by Google with cash from its web search business.


The Reason Behind the Oligopoly’s Stability :

An interesting question is why that group is stable. Firms must see the benefits of cooperation at the cost of economic competition, then agree not to compete and instead agree to the benefits of cooperation. Companies have sometimes found creative ways to avoid the presence of pricing, such as the use of the phases of the moon. Pricing is the act of setting prices, without allowing free market forces to set them. Another approach is for companies to follow a recognized value leader; When the leader raises prices, others will follow.

Prisoner’s Dilemma :

The main problem these companies face is that each company has an incentive to cheat; If all the firms in the oligopoly jointly agree to restrict supply and keep prices high, then each firm can capture enough business from the others to break the agreement by undermining the others. Such competition may be waged through prices, or it may simply be brought to market by the individual company expanding its production.

Game theorists have developed models for these scenarios, creating a kind of prisoner’s dilemma. When costs and benefits are balanced such that a firm does not want to be isolated from the group, it is considered a Nash equilibrium state for the oligopoly. This can be achieved through contractual or market conditions, legal restrictions, or strategic relationships between members of the elite that allow fraudsters to be punished.

Special Attention : 

It is interesting to note that the problem of maintaining an oligopoly and the problem of coordinating action between buyers and sellers in the market, in general, have shaped the payoffs of various prisoner’s dilemmas and the associated coordination games that iterate over time. Giving is included. As a result, many of the same institutional factors that facilitate the development of market economies by mitigating prisoners’ dilemma problems among market participants, such as secure contract enforcement, cultural conditions of high trust and reciprocity, and the laissez-faire economic policy can also occur. It is. Potentially help encourage and perpetuate oligopolies.

Governments sometimes respond to oligopoly with laws against price fixing and collusion. Still, a cartel can set the price if it operates outside the reach or with the blessing of governments. OPEC is an example of this because it is a cartel of oil-producing states without extensive powers. Alternatively, in mixed economies, oligopolies often seek and lobby for favourable government policies to operate under the direct regulation or supervision of government agencies.


Negative Effects of an Oligopoly :

An oligopoly occurs when a few companies exercise significant control over a given market. Together, these companies can co-exist with each other to control prices and ultimately offer uncompetitive prices in the marketplace. Other harmful effects of an oligopoly include limiting new entrants to the market and reducing innovation. Oligopoly has been found in the oil industry, railway companies, wireless carriers, and big tech.


What is an example of the Present Oligopoly?

One measure that shows whether an oligopoly exists is the concentration index, which calculates the size of companies compared to their industry. Examples, where high concentration ratios exist, include the media. For example, the US In the US, only five companies dominate the sector: NBC Universal; Walt Disney; Time-Warners; Viacom CBS; And News Corporation, even streaming services like Netflix and Amazon Prime, are starting to encroach on this market. Meanwhile, within big tech, two companies control smartphone operating systems: Google Android and Apple iOS.

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Last Updated : 28 Sep, 2022
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