Oligopoly

Published Jan 10, 2023

Definition of Oligopoly

An oligopoly is defined as a type of market structure in which a few firms dominate the entire industry. That means there are only a small number of firms that control the majority of the market share. As a result, these firms have significant market power (i.e., influence on the market price) and can influence the quantity of goods and services produced.

Example

A current example of an oligopoly is the tech industry. This industry is dominated by a few big players, like Google (i.e., Alphabet), Meta (i.e., formerly Facebook), and Amazon.

Another example is the airline industry. In the United States, more than 60% of all domestic flights are covered by only four airlines: American Airlines, United Airlines, Delta Airlines, and Southwest Airlines.

All of these companies have a significant influence on their respective markets. If one of them decides to lower its prices, the other companies will likely follow suit. This is because they know that if they don’t, they will lose market share to the company that lowered its prices.

Why Oligopoly Matters

Oligopolies are important because they can have a significant impact on the economy. For instance, they can lead to higher prices and reduced competition, which can have a negative effect on consumers. On the other hand, oligopolies can also lead to increased efficiency and innovation, which can benefit consumers (see also Cournot vs. Bertrand Oligopoly).

Thus, it is important for policymakers to be aware of the potential effects of oligopolies and take appropriate measures to ensure that the market remains competitive and that consumers are not harmed.