Oligopoly is a term used to describe a market structure in which there are only a few firms competing in an industry. Oligopolies are characterized by a few firms that have a large market share, which gives them the ability to affect market prices and quality of goods and services.
An oligopoly is different from a monopoly in which there is only one firm in the market dominating the supply and setting the prices. Oligopolies also differ from a perfect competition where a large number of firms produce identical products, allowing no firm to have any control over the market.
Since there are few firms in an oligopoly, they are able to influence the price and quality of goods and services. This gives the firms economic power over consumers. As a result, oligopolies can lead to high prices, low quality of products and inefficiencies in the marketplace.
In order to maintain their economic power, firms in an oligopoly may collude with one another to fix prices and limit output. This practice is known as price fixing and is illegal in many countries. Without cooperation among firms, they may also engage in non-price competition such as advertising or offering unique products and services.
Oligopoly is a common practice in many industries such as automotive, telecommunications and food and beverage. The few firms in an oligopoly make it difficult for new entrants to enter the market and compete. This creates a barrier to entry to an oligopoly and enables the few firms to maintain their competitive advantage.
The advantage of an oligopoly to consumers is that there may be better product quality due to the competition between the firms. Without fully competitive markets, firms tend to engage in product research, development and innovation to differentiate their offering and maintain their competitive advantage. This helps lead to new and better products, which are beneficial to consumers.
The disadvantage of an oligopoly is that it may lead to higher prices and less innovation. Firms can easily collude to fix prices and thus, reduce or eliminate price competition. This could lead to higher prices and less quality of product or service. Oligopolistic markets also tend to be less efficient due to a lack of price competition.
Overall, an oligopoly is a market structure where a few firms dominate an industry. Although there are benefits to consumers such as better product quality, and improved innovation, an oligopoly could also lead to higher prices, reduced competition and decreased efficiency in the marketplace.
