Oligopoly is a form of market when there are several sellers. The main feature of an oligopoly is the presence of large enterprises with access to customers. Of course, it is possible to enter the market, but it is extremely difficult for a new company to do so. Not only the sale of goods, but also the production processes are predominantly in the power of these big businessmen. An alternative name for such a market form is the competition of the few.
Will you share the place?
The hallmark of an oligopoly is the dominance of a few fairly large companies. In some cases, it is characterized as relative, but absolute dominance of the market is also possible. Enterprises are quite large due to the fact that there are few of them on the market. The classic oligopoly model is built with the participation of a couple of firms up to 15. Their capabilities are completely sufficient to satisfy consumer demand.
From such a structure of the market, it directly follows that the relationship of the enterprise is forced to maintain rather closely among themselves. At the same time, a sign of an oligopoly is the pronounced competition of cooperating persons. Compared with perfect competition, oligopoly differs in the presence of a reaction fromrival enterprise. This is not typical for a pure monopoly, only the participants in the oligopolistic model need to be ready for a response. The mutual influence of firms on the behavior of all market participants controls competition in various areas, from sales, production volumes to pricing policy.
Market and product features
The market in the form of an oligopoly is filled with both differentiated and homogeneous goods. Much depends on the consumer. If there is no specific preference for a particular brand, and the products on sale replace one another, it is customary to talk about a pure industry. This is a key feature of an oligopoly of a homogeneous type. In practice, this occurs in the production of cement, newspaper paper, viscose.
Slightly different situation develops when goods cannot completely replace one another, there are trademarks that give individuality to positions. The difference can be real - parameters, design solution, quality, but this condition is not necessary. Often the differences are imaginary - brand identity, advertising campaign. This phenomenon is a typical sign of a differentiated type of oligopoly. In modern times, one can observe the structure of the market in the sector of sales of cars, cigarettes, beer.
Who's new?
The main feature of an oligopoly is the possibility of a new enterprise entering the market. It is quite difficult to achieve success, while you need to understand how the market has developed. Allocate slowly growing and dynamic (young) enterprises. In the first case, it is extremely difficult to be a new member. This isto a greater extent typical for industries whose production processes require complex technologies, equipment, large-scale production processes, impressive financial values that can stimulate sales. For such an area, productivity can only be achieved by expanding production capacity, reducing unit costs.
If a young enterprise is interested in entering the market, where the bulk is already owned by well-established companies, it is necessary to prepare for an impressive capital investment in development. Considering the concept, the signs of an oligopoly, we have to admit: only competitive firms can afford to take the barrier of an established market formed according to such a system, and only if they already have impressive resources, both organizational and monetary.
And if not?
A small enterprise that does not have serious resources for initial promotion can try to enter the market built in the form of an oligopoly. Currently, this is possible due to the active growth in demand. One of the hallmarks of an oligopoly is an increase in supply that does not lead to a decrease in consumer activity. This feature gives good chances to young enterprises that have a really interesting offer for the buyer, presented at an adequate cost.
Features of market strategies
The key feature of an oligopoly is the mutual dependence of all those present on the marketbusinesses from each other. It is from this feature that the behavior of enterprises follows, allowing them to survive. In comparison with alternative market structures with an oligopoly, the participant must remember the influence of the selected production, sales volumes, cost level on the state of the market, and vice versa. Competitors will adapt or make decisions that will allow them to win their share of consumer interest, taking into account the changing conditions of rivals.
A market participant in the form of an oligopoly cannot analyze the demand curve, considering it to be given, and also does not have a marginal yield curve at all. A similar sign of an oligopoly market: there is no demand curve, the situation adjusts to the behavior of all market participants. At the same time, it is not possible to find an equilibrium point, an optimal position.
How will we work?
Depending on the features, an oligopoly market can be classified as cooperative or non-cooperative. The first option assumes consistency of behavior. Enterprises conspire with each other so that their policies do not contradict and interfere with rivals. The non-cooperative form involves the desire to maximize its profitable component in all possible ways, acting completely at its own discretion and risking position.
Signs of the functioning of an oligopoly of a non-cooperative type are well analyzed in the Stackelberg model. Interesting information can also be drawn from the Cournot theory and the broken demand curve model. The opposite side is representedcartel models, price leadership. Particularly interesting, from the point of view of many analysts and economists, is game theory, from which one can understand how firms choose strategies and how they decide in favor of one or another oligopoly option.
When time works for us
Another basic sign of an oligopoly is a focus on the future. All market models belonging to this structure assume that enterprises operate for long periods of time and equalize the cost of products over time. In practice, the theory, as analysts say, is fully confirmed. This applies even to a situation where the level of costs varies significantly, and the demand for products also varies. Companies are still forced to set a single price level for the same products, and bring a comparable level to the rest. Only a very large difference in the product can allow a sale at an increased cost.
Because an oligopoly is characterized by a uniform pricing policy, companies are forced to interact in order to reach a level that will satisfy all participants to a greater or lesser extent. A variety of tools come to the rescue, from secret agreements to the use of the media, including conscious parallelism.
Price coordination: what's stopping you?
The above signs of the functioning of the oligopoly market lead in some cases to the impossibility of coordinating pricing policy. This is observed when the following factors are present:
- the emergence of new market participants who do not want to comply with the established rules, violating the already established relationship between the client and the seller;
- instability of demand in the industry;
- innovations related to the technical aspects of the workflow and correcting the level of costs of individual enterprises;
- some companies are losing or gaining new market share;
- product highly differentiated;
- product changes frequently;
- the formation of new industries, and the speed of the process does not allow current market participants to adapt to changes in a timely manner.
Competition: not money alone
Considering the characteristics of an oligopoly, special attention should be paid to non-price competition. The market in this form is quite tough, so enterprises, in order to win the interest of the client, are forced to use all available methods and means. Even in the case when the company has a certain head start in terms of costs, lowering prices with an oligopoly as a form of market activity is not the best option, so preference should be given to non-financial options. Keep in mind that lowering the cost provokes a chain reaction: all other enterprises can follow the same step.
A distinctive feature of the use of non-price advantages is the difficulty of repeating such approaches by other enterprises. Consequently, the effect is much longer than with a variation in pricing policy.
What to use?
More oftenmost attract the attention of customers:
- Increase product differentiation.
- Improving the quality of service.
- Design solution, style.
- Product technical parameters.
- Credit conditions.
- Long service life.
- Warranty.
- Advertising campaigns.
- Increasing the product range.
Historical background and contemporary setting
To understand the distinguishing features of an oligopoly, it is worth paying attention to the past of our civilization, the period when the economic society was just emerging. Economics became a science during the life of the ancient Greek scientist and philosopher Xenophon. The ideas and theories expressed by him, conveyed to the public in the work "Economics", became the foundation for modern society. Over time, not only the name of science, but also its essence has changed significantly.
Some experts believe that it is at the present time that the economy is developing most actively, in many ways shaping our civilization. Producers and buyers have ample opportunity to manufacture and receive a variety of products, but the "invisible hand" allows you to regulate the situation, as well as modern methods of disseminating information about products.
Relevance of the issue
According to experts, it is mainly the distinctive features of the oligopoly that dominate the markets at the present time. Built according to these rulesmost of the industry within our realm. This includes oil refining, metallurgy, and the chemical industry. Oligopoly implies the possibility of forming a market with a rather specific structure, preventing numerous applicants (the concept of a barrier has already been considered above). If a certain company is interested in becoming a member of such a "closed circle", it is necessary to carefully study the peculiarity of the industry in order to have a chance to be a full-fledged element of the structure.
When talking about the degree to which a market belongs to an oligopoly, one does not simply count how many enterprises are operating at the moment, but reveals the share of large firms in relation to total production facilities. A rigid oligopoly is distinguished by only a couple of large-scale enterprises that own up to 80% of the entire market, and there are small companies for the remaining 20% of demand. If there is such a situation that there are only two firms in the market that produce almost the same product, one speaks of a duopoly. With an increase in the number of participants up to four inclusive, a classical oligopoly is observed. Above this number, the market becomes amorphous.
Alternative
Classification of types of oligopoly in accordance with the theoretical calculations of Nordhaus, Samuelson is as follows:
- Dominant.
- Secret.
- Monopolistic.
About barriers
Financial is associated with the scale of the activities of enterprises that are successful in an oligopoly. Large scale production allowseffectively save on each individual position, but requires the introduction of significant amounts at the stage of inclusion in the market. At present, it is the magnitude of the financial barrier that is the main obstacle for an enterprise wishing to enter a market that adheres to such a structure. The launch of a product, the maintenance of production facilities require impressive investments, so the company, already a giant, successfully maintains its leading position in the market.
The capacitive barrier is another important issue that limits entry options. So, if firms interested in entering the market were able to cope with financial constraints, there is a high probability of bankruptcy or forced exit from the chosen industry, since the market has very limited demand. Oligopoly usually occurs in such elements of the market, when several large producers fully satisfy the demand of buyers. As soon as a new competitor appears, supply begins to exceed demand, which is associated with an increase in production costs and stimulates bankruptcy. However, the emergence of new enterprises brings a disadvantage to those that have already been successful in an oligopolistic market. This causes a price war and other approaches to competition in order to force out the newcomer.
Subjective factor
It is also called imperfect information. When enterprise analysts work to evaluate the behavior of competing companies, often the information used in the work is imperfect. This is due to the interdependenceenterprises from each other and subjective production factors. Thus, market participants cannot fully assess what decisions and on the basis of which competitors make. This forces one to try to predict the behavior of opponents, which is far from always possible, especially in conditions of insufficient information base.
Oligopoly: why did it happen?
The desire for oligopoly is driven by the ability to foresee the benefits of expanding production capacity and reducing costs per unit of output. Working through the possibilities of such a strategy, enterprises thereby rely on economies of scale. It only works in the long run, but the cost savings from expanding production are really significant.
As soon as a company grows to a serious scale, the industry in which it operates gradually transforms into an oligopolistic one. Modern conditions of constant modernization allow reaching very serious scales through optimization tools, which practically blocks access to the market for new enterprises, and large ones receive a number of important advantages.
Oligopoly is characterized by the exclusion of competitors primarily through the mechanism of bankruptcy. Sometimes they resort to merger opportunities or takeover small but promising enterprises. According to analysts, the merger is not always voluntary, sometimes it is forced by economic factors.
