In today's competitive era, new brands are emerging every day. Customers have access to more products than ever before, yet certain industries are dominated by a handful of large companies. Airbus and Boeing, for example, dominated the long-range airplane market for decades. Even today, oligopolies are prevalent in certain markets, such as the auto industry, the oil and gas industry, mobile phone services, media and entertainment.
In an oligopolistic industry, two or more companies dominate the market and compete closely for customers.
What Is Oligopoly?
An oligopoly is a market structure in which two or more interdependent companies dominate an industry. In a monopoly, by comparison, the market is heavily influenced by one firm.
A good way to understand the oligopoly definition is to think of major brands, such as Pepsi or Coca-Cola. These two dominate the soft drink market and sell similar products. They have been competing against each other for decades. Over the last 10 years, Pepsi's market share has dropped from 10.3 percent to 8.4 percent, while Coca-Cola's has reached 17.8 percent. If Pepsi changes its prices, Coca-Cola is likely to do the same.
Other oligopoly examples can be found in the national mass media industry, the aluminum and steel industry, computer operating systems, pharmaceuticals and more. Google Android and Apple iOS, for instance, are the leading operating systems for smartphones and hold the largest market share.
Key Characteristics of an Oligopoly Market Structure
In an oligopolistic industry, the main players have full control over price. Furthermore, they tend to match their competitors' prices and launch similar advertising campaigns. Their independence encourages competition in most areas, from product differentiation to loyalty schemes.
The companies dominating a market are price setters and focus on profit maximization. If one decides to launch a sales campaign, it must take into account the possibility that its close competitors will act in a similar manner, which would possibly trigger a price war. That's why prices in an oligopoly market structure are typically lower than in a monopoly. Additionally, they're less likely to increase or drop too much, as it happens in a competitive market.
Since oligopolists are independent, they must anticipate their competitors' strategy in terms of price, advertising and other factors. For example, they have to make strategic decisions, such as whether to implement a new marketing strategy or wait to see what their competitors do.
In theory, anyone can enter an oligopolistic industry. However, this is extremely difficult because of the tight competition between the main players. New entrants may lack the capital and technology necessary to compete with the existing firms.
Other barriers include the high set-up costs, patents, government licenses, predatory pricing, contract exclusivity and more. For instance, contracts between vendors and suppliers can exclude other vendors from entering the market. Additionally, major brands usually have loyalty programs in place, which helps them retain customer loyalty and deters newcomers.
Limitations and Disadvantages
No market structure is perfect. An oligopolistic industry may benefit both customers and brands, but it still has its drawbacks. First of all, it makes it difficult for smaller companies to enter the market. This results in fewer product choices for customers.
Furthermore, an oligopoly market structure may limit innovation. Since the main players know that their profits are guaranteed, they are less likely to develop new, innovative products.
This market structure is also characterized by fixed prices, which can be a disadvantage under certain circumstances. For example, if a company raises its prices, its competitors will do the same, forcing customers to pay more. That’s why most countries have implemented laws that prevent fixed pricing.