The terms "monopoly" and "oligopoly" refer to the number of sellers of products or services in a defined target market or geographic region. A monopoly exists when consumers can only purchase products or services from a single provider, which allows the company to set prices without concern for competition. An oligopoly is a market dominated by a limited number of competing businesses, where a single company may have a significant influence on the pricing of goods and services.
How Monopolies Form
Monopolies can come into existence under a variety of conditions, but a common thread is that the barriers to entry are too expensive for smaller competitors to sell products or services in that specific market. These barriers can be put in place through prohibitive infrastructure costs or anti-competitive government practices including regulatory standards, subsidies and tariffs. Monopolies can also form when businesses develop and patent intellectual properties for goods or services -- for example, a pharmaceutical company that develops the first drug to treat a medical condition.
Examples of Monopolies
AT&T was a monopoly that formed as a result of high infrastructure costs, anti-competitive practices and the nationalization of the telecommunication industry by the U.S. government in 1918. Prior to being nationalized, AT&T built a long-distance telephone network at a high cost and bought companies that were deemed as competitors. After being nationalized, AT&T was granted an exclusive service contract that prevented competitors from installing phone lines. The monopoly was broken up in 1984, due in large part to the rise of competing technologies such as cable, satellite and wireless communication. A present example of regional monopolies exists with cable companies. These monopolies have been set up in the same fashion as AT&T, with high infrastructure costs and exclusivity granted by regional or municipal decree.
Oligopolies and Competition
Oligopolies stand between the anti-competitive nature of monopolies and the open competition of free markets. In an oligopoly, prices tend to remain relatively stable as one company that raises prices will see its customers go to competitors, while price cuts eventually are matched by those same companies. Rather than competing on prices, companies in an oligopoly compete with each other through research and development as well as advertising and developing advantageous relationships with vendors. Much like monopolies, the barriers to entry for smaller companies are usually prohibitive.
Examples of Oligopolies
Oligopolies exist in a variety of industries in domestic and international markets. Examples include airlines, health insurers, automobile companies, soft drink makers and oil producers. These industries are dominated by a limited number of companies and have high barriers to entry. For example, according to the Los Angeles Times, Anthem and Kaiser Permanente accounted for combined market share of 63 percent of the health insurance market in California. Among soft drinks and refreshment beverages, Coca-Cola and Pepsi own approximately 60 percent of the market. Like many oligopolies, these soft drink makers generally don’t compete on price and focus instead on advertising and broadening their offerings to increase market share.
After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.