Oligopoly is an economic term used to describe a specific type of competitive environment. The word "oligopoly" comes from the Greek oligos, meaning "little or small" and polein, meaning "to sell." When oligos is used in the plural, it means "few." The word oligopoly is used to refer to a market sector in which there are only a few competitors.
Oligopoly Meaning: What is an Oligopoly?
An oligopoly is a middle ground between a monopoly and open competition. An oligopoly occurs when a small group of businesses, at least two, control the market for a certain product or service. This gives these businesses a huge influence over price and other aspects of the market. While other businesses could seek to enter an oligopoly, it is difficult to compete as a startup in an industry dominated by only a few market leaders.
Since it is the middle ground, oligopoly examples are abundant in the economy.
- aluminum production - In the U.S., the top two steel producers (Arconic and Alcoa) have annual revenue in excess of ten billion dollars each.
- automobile manufacturers - The worldwide automobile manufacturing industry is dominated by just 14 corporations.
- beer industry - Anheuser-Busch and MolsonCoors dominate the U.S. beer industry as of 2020. In 2016, when Anheuser Busch purchased the parent company of all of Miller brands, the U.S. Department of Justice required them to sell MillerCoors (now Molson Coors) and a smaller producer in order to prevent a monopoly.
- book publishing - The book publishing industry is dominated by "the big five," which are Penguin Random House, Hachette Livre, HarperCollins, Macmillan, and Simon & Schuster.
- breakfast cereal manufacturers - Almost all commercially available breakfast cereal is manufactured by Kellogg, General Mills, Post and Quaker.
- cell phone providers - Three companies (Verizon, Sprint and AT&T) dominate virtually all of the U.S. cell phone market. Until 2020, T-Mobile would have been listed as a fourth competitor, but they merged with Sprint.
- commercial air travel - In the United States, four companies (Delta, United, American, and Southwest) dominate the commercial air travel industry.
- media outlets - The vast majority of broadcast and cable media outlets in the U.S. are owned by one of six corporations (NBC Universal, News Corporation, Time Warner, ViacomCBS, and Walt Disney).
- music industry - Four music companies control virtually all of the market. They are Universal Music Group, Sony Music Entertainment, Warner Music Group, and EMI Group.
- oil and gas industry - The oil and gas industry is dominated worldwide by a few large companies, often collectively referred to as "big oil."
- search engines - Only a few major companies (Google and Bing) dominate the market for search engines. These same companies dominate search-based internet advertising.
- social media - The major social media outlets (Facebook, Twitter and Instagram) function as an oligopoly.
- steel production - The steel industry is dominated by only a few major producers, all of which produce products that are identical or virtually identical.
- tobacco industry - The global tobacco industry is heavily dominated by only a few corporations.
Businesses that are part of an oligopoly share some common characteristics:
- degree of concentration - Oligopolies are less concentrated than in a monopoly but more concentrated than in a competitive system.
- pricing - It is not legal for competitors to engage in collusion to set prices, but pricing does tend to remain stable in an oligopoly. Prices are often set lower than they could be with the intention of keeping new companies out of the market by making it difficult for them to offer products at a similar price.
- product similarity - Businesses in an oligopoly offer products or services that are nearly identical or very similar. This encourages competition in non-price-related areas, like advertising, packaging and value-added features.
- competition still exists - Businesses within an oligopoly actively compete with the few competitors they have. Airlines seek to outdo each other with their rewards programs. Car manufacturers seek to position their vehicles as superior to others and try to win customers with favorable financing options.
- high startup and production costs - Oligopolies develop in industries that require a large sum of money to start. Existing companies in oligopolies often have cost advantages as the result of mass production, volume discounts from suppliers, economies of scale, and the cost of convincing consumers to try a new product.
- other barriers to competition - Money isn't the only major barrier that keeps competitors away from oligopolies. Major barriers include exclusive access to resources or patented processes, patents, actions of the businesses in the oligopoly, or government limits on the number of licenses that are issued.
Oligopoly vs. Monopoly
A monopoly is exclusive control of the market by one business because there is no other group selling the product or offering the service. An oligopoly is different from a monopoly because there is more than one supplier. While competition is limited in an oligopoly, there is still some competition. There is no competition in a monopoly.
- A true monopoly rarely exists because antitrust laws keep this type of market condition from existing. With no competition, businesses could increase the price while reducing output to increase profits. In addition to higher prices, a monopoly can also lead to inferior products and services.
- A "natural monopoly" exists where having more than one supplier would be inefficient, like in some public utilities. If you live in an area where there is only one power company, that is a monopoly. If you live in an area where you can choose between a few power companies, that is an oligopoly.
Oligopoly vs. Open Competition
Open competition is defined by a free market in which there are, or can be, many competitors. The industry is not dominated or controlled by just a few large organizations. With an oligopoly, there are only a few competitors. While other businesses could enter an oligopoly, it is more likely that investors would seek to enter a niche with open competition rather than trying to break into a market that is already controlled by a few major players.
- Businesses that function within open competition typically have lower barriers to entry than those that are oligopolies. For example, it would be more reasonable for an entrepreneur or a group of investors to start a car dealership than to begin a new car manufacturer.
- When you think of fields that include independently owned businesses of all sizes fairly competing with large corporations, that is an example of open competition. Restaurants are a great example of this type of market condition.
Boost Your Economic Knowledge
Now that you are familiar with what an oligopoly is, focus on learning more about economics. Start by discovering some basic economic terms and concepts. From there, you may want to explore some business word abbreviations.