Oligopoly Types, its Classification, Causes, Consequences and Characteristics

We explain what an oligopoly is, how it is classified and the practices it carries out. In addition, its characteristics, causes and consequences.

What is an Oligopoly?

By oligopoly we understand a market structure of imperfect competition , characterized by a small group of large producers of goods or services, and a broad commercial demand, for which this group acquires a market power that allows it to set prices and quantities, managing supply and demand variables at your convenience .

Oligopolies are contrary to the idea of market competition since, as there are few and privileged producers, they are always aware of the movements of others and their actions and decisions are always produced within the framework of a closed circuit (of close communication ). In that it is similar to the notion of monopoly , except that there is not one privileged producer in control, but several.

Thus, these types of market structures are usually comfortable for oligopolistic companies but harmful to the needs of consumers , since they impoverish the market by preventing the entry of new and diverse competitors.

Oligopoly Models

Although there is no proper theory for the study of oligopolies, different models or oligopolistic cases are considered, which, although they must be evaluated separately, serve as a frame of reference for future cases.

Thus, it is often spoken of oligopolies in large-scale economies , in general, whose entry to the market is usually expensive, such as in the commercialization of electricity or in the distribution of fuel.

In other cases, for the study of oligopolies , game theory is used , which establishes action and reaction as dynamics of business communication and feedback between competitors.

Differences between oligopoly and monopoly

The fundamental difference between oligopoly and monopoly is expressed in the roots of both words that come from ancient Greek: oligos ("few") and mono ("only one").

While in a monopoly scenario a single company controls the entire market through its decisions , in an oligopolistic one it is a set of them controlling the market through an advantageous competition that does not pose a risk for any of them but for the emergence of other aspiring controlled market.

Types of oligopoly

There are two forms of oligopoly according to the marketed product:

• Differentiated. The controlled supply of products in the market is diverse, that is, it encompasses products of various branches or of a different nature. It generally involves a variety of manufactured goods.
• Concentrated. It occurs when there are industrial concentration processes, that is, little production of products from the same raw material , or from identical goods. It generally involves markets for raw materials and semi-processed goods.

Duopolies

Duopoly is often seen as a form of oligopoly. It is about the full control of the market by two antagonistic companies , that is, rivals, whose dispute over the market disables the entry of third competitors, since only the two of them can respond to the price structure or precisely make the demands of initial investment .

Business interdependence

Relationships between oligopolistic companies tend to be mutually dependent, and can be classified as:

• Collusive. The companies reach agreements to control the market, acting jointly in terms of quantity of products offered, launch prices, market distribution, etc. It is the most common situation and usually leads to dual monopolies.
• Not collusive. Companies occupy strategic positions to oppose each other and compete, although they are intolerant of new competitors entering the market.

Market entry barriers

In general, oligopolies arise as a result of the appearance of strong barriers to entering the market , either characteristic of commercial dynamics or imposed by themselves, or by external forces such as the State .

That is why they are necessarily considered a market of perfect competition , at the same time as an intermediate point between a monopoly situation and the ideal of a market of perfect competition.

These barriers can be legal (patents, tenders, etc.) or strategic (agreements with distributors, overproduction, etc.).

Oligopolistic practices

Many common practices in oligopolies are frowned upon because they impoverish the market and represent unfair gestures towards competition. Some of them are:

• Dumping. The goods offered are produced for a time at lower prices and even below the cost of consumption. This creates a temporary loss situation that only strong large companies can withstand, leaving small or new ones in a bind.
• Aggressive marketing. The hoarding of promotional spaces through capital investments, media purchases or other strategies can lead to conflicts of interest that, in oligopolistic scenarios, are overlooked in favor of the benefit of large producers.
• Production agreements. Agreements to limit production or, on the contrary, overproduction to flood the market, may be some of the tactics that large oligopolistic companies allow themselves, but not so small or beginners.

Causes of oligopoly

There are several possible causes for such a situation. Some so-called “natural” oligopolies derive from the demanding markets of economies of scale , that is, large-scale production at low costs, which makes business unviable for small companies and allows large companies to prosper and sustain themselves.

Other options point to State interventions , in which it fosters conditions of protection, unfair competition or defense of a few companies that enjoy an artificially privileged offer.

And a last case points to the predilection of a certain public for the trajectory of a company or for its reputation, for which the strategic management of its reputation is key .

Consequences of the oligopoly

The main consequences of the oligopoly have to do with the impoverishment of the market , insofar as there is no real competition and companies already established do not feel pressured to radical innovation , to update, but rather feel more secure.

On the other hand, oligopolistic companies tend to merge , thus becoming closed monopolies and are often the ideal setting for dishonest practices or unfair competition.

Examples of oligopoly

Examples of oligopolistic situations are:

• The rivalry between Pepsi and Coca-Cola for the soft drink market.
• The supply of telecommunications and cellular telephony, or of cable operators in a country, whose number rarely exceeds three or four.
• Airlines, especially in countries with less frequent flights.
• Fast food, controlled by a few brands depending on the niche: hamburgers, for example, are the province of McDonald's, Wendy's, Burger King, and a few others.

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