What is an Oligopoly?

An oligopoly is a situation where a small number of large firms dominate the market, taking up most of the market share for the products and services they provide. A common example seen in many nations is the cellular telephone industry, where typically a handful of big companies take up 80% or more of the market. Some related terms include monopoly, where only one company dominates the market, and duopoly, where two firms have the majority of the market share.

Oligopolies often arise naturally as companies grow and start to capture more of the market, pushing smaller companies out or absorbing them. Over time, the number of companies offering particular products and services starts to dwindle, and consumers rely on several big companies rather than a network of smaller firms. In an oligopoly, the big companies tend to control pricing and access, making it very difficult for other companies to break into the market. This also makes it very difficult to break up their industry domination.

The big companies inevitably develop an interdependent relationship because the actions of one company have a profound impact on the others. When a company lowers prices, offers new services, or develops new products, the competitors have to follow suit or risk losing customers. This can have the effect of looking like collusion and price fixing, and sometimes it is difficult for regulators to determine when companies in an oligopoly are truly acting independently, and when they are working with each other as a cartel to fix market conditions.

An oligopoly can be unfavorable for consumers. With only a few large companies offering very similar ranges of options to rely upon, people may have trouble finding products and services at competitive prices. If they can locate smaller firms, they may be able to get a better deal, but many of these companies struggle to expand their reach and product range. The big firms may also participate heavily in government lobbying to increase the chances of passing laws favorable to their interests, and this could hurt small companies.

Governments will not take action to dilute an oligopoly unless they can find clear evidence of price fixing or they have concerns that a company may be on the way to becoming a monopoly. When big companies acquire each other, they may need to pass a regulatory inspection to determine if the merger would have the effect of creating a single dominant company. The government may require the companies to sell off divisions in order to prevent this if they want to go through with the sale.