Oligopoly is a form of market when there are several sellers. The main sign of oligopoly is the presence of large enterprises with access to customers. You can enter the market, of course, but for a new company it is extremely difficult to do. Not only the sale of goods, but also production processes are mainly in the hands of these large businessmen. An alternative name for such a market form is the competition of a few.
But will you share the place?
A distinctive feature of the oligopoly is the dominance of several fairly large-scale companies. In some cases, it is characterized as relative, but absolute market dominance is also possible. Enterprises are quite large due to the fact that they are few in the market. The classical oligopoly model is being built with the participation of a pair of firms up to 15. Their capabilities are fully sufficient to satisfy consumer demand.
From a similar market structure, it directly follows that the relationship of the enterprise is forced to maintain among themselves quite closely. At the same time, a sign of oligopoly is the expressed competition of collaborating individuals. Compared to perfect competition, oligopoly is characterized by the presence of a reaction from a competing enterprise. This is atypical for a pure monopoly, only the participants in the oligopolistic model need to be prepared for an answer. The mutual influence of firms on the behavior of all market participants controls competition in various fields, from sales, production volumes to pricing policy.
Market and Product Features
The market in the form of an oligopoly can be filled with both differentiated and homogeneous goods. Much depends on the consumer. If this does not manifest specific preferences for a particular brand, and the products on sale replace one another, it is customary to talk about a clean industry. This is a key feature of a homogeneous type of oligopoly. In practice, this is found in the areas of production of cement, paper for newspapers, viscose.
A slightly different situation is when the goods cannot be completely replaced by another; there are trademarks that give individuality to positions. The difference can be real - parameters, design decision, quality, but this condition is not necessary. Often imaginary differences - the identity of the brand, advertising campaign. This phenomenon is a typical sign of a differentiated type of oligopoly. In modern times, one can observe the market structure in the sector of sales of cars, cigarettes, beer.
Who's new?
The main sign of oligopoly is the possibility of entering the market of a new enterprise. To achieve success is quite difficult, but 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 is more typical for industries whose production processes require complex technologies, equipment, large-scale production processes, and impressive financial values that can stimulate sales. For such a sphere of productivity can only be achieved by expanding production capacities, reducing costs per unit of output.
If a young company is interested in introducing into a market where the bulk are already owned by well-established companies, it is necessary to prepare for an impressive investment in development. Considering the concept, signs of oligopoly, we have to admit: only competitive firms can afford to take the barrier of an established market formed by such a system, and only if they already have impressive resources, both organizational and financial.
And if not?
A small enterprise that does not have serious resources for initial promotion may 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 oligopoly is the growth in supply, which 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
A key feature of oligopoly is the mutual dependence of all enterprises on the market on each other. Exactly from this feature follows the manner of enterprise behavior that allows them to survive. In comparison with alternative market structures with an oligopoly, the participant must remember the influence of the selected production, sales volumes, level of value on the state of the market, and vice versa. Competitors will adjust or make decisions that will allow them to gain their share of consumer interest, taking into account the changing conditions of the 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 the oligopoly market: there is no demand curve, the situation adapts to the behavior of all market participants. However, it is not possible to find the equilibrium point, the optimal position.
How will we work?
Depending on the characteristics, the oligopoly market can be ranked as cooperating or not being such. The first option involves consistency of behavior. Enterprises conspire with each other so that their policies do not contradict or interfere with their rivals. Uncooperated form involves the desire to maximize its profitable component in all possible ways, acting completely at its own discretion and risking the situation.
The signs of the functioning of an uncooperated oligopoly are well understood in the Stackelberg model. Interesting information can also be extracted from the Cournot theory and the model of a broken demand curve. The opposite side is represented by cartel models, price leadership. Of particular interest, from the point of view of many analysts and economists, is the theory of games, from which it is possible to understand how firms choose strategies and how they decide in favor of a particular variant of oligopoly.
When time works for us
Another main sign of oligopoly is the focus on the future. All market models belonging to this structure suggest that enterprises operate for long periods of time and even out the value of products over time. In practice, the theory, as analysts say, is fully confirmed. This applies even to situations where the level of costs varies significantly, and the demand for products varies. Companies are still forced to set a single price level for the same products, and to display a comparable level for other products. Only a very large difference in the product can allow the sale at an increased cost.
Since oligopoly is characterized by a uniformity of pricing policy, companies are forced to interact in order to reach a level that will more or less satisfy all participants. A variety of tools come to the rescue, from secret agreements to using the capabilities of the media, including conscious concurrency.
Price coordination: what is in the way?
The above signs of the functioning of the oligopoly market lead in some cases to the inability to coordinate pricing policy. This is observed in the presence of the following factors:
- the emergence of new market participants who do not want to comply with the established rules that violate the already existing relations between the client and the seller;
- instability of demand in the industry;
- innovations related to the technical aspects of the workflow and adjusting the level of costs of individual enterprises;
- some companies lose or acquire new market shares;
- the product is highly differentiated;
- the product often changes;
- the formation of new industries, and the speed of the process does not allow existing market participants to timely adapt to changes.
Competition: not a single money
Considering what signs characterizes the oligopoly, special attention should be paid to non-price competition. The market with this form is quite tough, therefore, enterprises in order to gain the interest of the client are forced to use all available methods and means. Even if the company has some head start in 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. It should be borne in mind that lowering costs provokes a chain reaction: all other enterprises can go 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?
Most often attract the attention of customers:
- Increased product differentiation.
- Improving the quality of service.
- Design decision, style.
- Product Technical Parameters.
- Credit terms.
- Duration of operation.
- Warranty obligations.
- Advertising campaigns.
- An increase in the stock range.
Historical background and modern decor
To understand the distinguishing features of oligopoly, it is worth paying attention to the past of our civilization, the period when economic society was just in its infancy. 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 of Ekonomikos, 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 present that the economy is developing most actively, largely shaping our civilization. Manufacturers, buyers have ample opportunity to manufacture and use a wide 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 distinguishing features of the oligopoly that currently dominate the markets. By these rules, a large part of the industry was built within our country. These are oil refining, metallurgy, and chemical industry. Oligopoly suggests the possibility of forming a market with a rather specific structure, without allowing many comers (the concept of a barrier has already been considered above). If some company is interested in becoming a member of such a "closed circle", you need to carefully study the characteristics of the industry in order to have a chance to be a full-fledged element of the structure.
When they talk about the degree of market affiliation with the oligopoly, they do not just count individually how many enterprises are currently operating, but reveal the share of large firms relative to common production facilities. A tough oligopoly is distinguished by just a couple of large-scale enterprises, which own up to 80% of the entire market, and the remaining 20% of demand is small companies. If the situation is such that only two companies that produce almost the same goods are present on the market, they speak of duopoly. With an increase in the number of participants to four, classical oligopoly is observed. If this number is exceeded, the market becomes amorphous.
Alternative option
The classification of oligopoly types in accordance with the theoretical calculations of Nordhaus, Samuelson is as follows:
- Dominant.
- Secret.
- Monopolistic.
About barriers
Financial is associated with the scale of activity of enterprises that are successful in the conditions of oligopoly. Large-scale production can effectively save on each individual position, but requires the introduction of significant amounts at the stage of inclusion in the market. Currently, it is the scale of the financial barrier that is the main obstacle for an enterprise wishing to enter a market that adheres to such a structure. The release of the product, the maintenance of production capacities requires an impressive investment, therefore, the already giant company successfully maintains its leading position in the market.
Capacitive barrier is another important issue that limits entry. So, if companies interested in entering the market were able to cope with financial constraints, there is a high probability of bankruptcy or forced exit from the selected industry, since the market has very limited demand. Typically, oligopoly arises in such elements of the market when several large manufacturers fully satisfy the demand of customers. As soon as a new competitor appears, the offer begins to exceed demand, which is associated with an increase in production costs and stimulates bankruptcy. However, the emergence of new enterprises brings a minus to those that have already been successful in the oligopolistic market. This becomes the cause of a price war and other approaches to competition in order to oust 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 mutual dependence of enterprises on each other and subjective production factors. Thus, market participants cannot fully evaluate what decisions and on the basis of which competitors make. This forces one to try to predict the behavior of rivals, which is not always possible, especially in conditions of insufficient information base.
Oligopoly: why did it happen?
The desire for oligopoly is due to the ability to anticipate the benefits of expanding production capabilities and reducing costs per unit of output. When exploring the possibilities of such a strategy, enterprises thereby rely on economies of scale. It works only in the long term, but the decrease in costs with the expansion of production is really significant.
As a company grows to a serious scale, the industry in which it operates gradually transforms into an oligopolistic one. The current conditions of continuous modernization make it possible to achieve very serious proportions through optimization tools, which practically blocks access to the market for new enterprises, while large ones have a number of important advantages.
Oligopoly is characterized by crowding out competitors primarily through the bankruptcy mechanism. Sometimes they resort to merger opportunities or absorb small, but promising enterprises. According to analysts, the merger is far from always voluntary, sometimes economic factors force this.