An economic setup in which a few companies rule over many in a particular market or industry
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The primary idea behind an oligopolistic market (an oligopoly) is that a few companies rule over many in a particular market or industry, offering similar goods and services. Because of a limited number of players in an oligopolistic market, competition is limited, allowing every firm to operate successfully. The situation typically breeds regular partnerships between firms and fosters a spirit of cooperation.
An oligopoly is a term used to explain the structure of a specific market, industry, or company. A market is deemed oligopolistic or extremely concentrated when it is shared between a few common companies. The firms comprise an oligopolistic market, making it possible for already-existing smaller businesses to operate in a market dominated by a few.
For example, major airlines like American Airlines and United Airlines dominate the flight industry; however, smaller airlines also operate within the space, offering special flights in the holiday niche or offering unique services as Southwest does, providing special guest singers and entertainment on certain flights.
Breaking Down Oligopolistic Markets and Firms
When thinking about oligopolistic companies, it’s important to note that these are the firms that operate in an oligopolistic market. The businesses are generally the trend and price setters, seeking out and forming partnerships and deals that establish prices that are higher than the ruling companies’ marginal costs. It means that oligopoly firms set prices to maximize their own profit. Ultimately, it leads to partnerships and collaborations that foster success for themselves and other firms, specifically smaller companies operating within the same market or industry.
If one firm in a market lowers its prices on goods and services, attaining optimal sales growth, firms in direct competition usually follow suit, often creating a price war. Oligopoly companies generally do not enter such price wars and, instead, tend to funnel more money into research to improve their goods and services and into advertising that highlights the superiority of what they offer over other companies with similar products.
Entering Oligopolistic Markets
Because of the structure of oligopolies, new firms typically find it difficult – if not impossible – to penetrate into oligopolistic markets. It is primarily due to two significant factors: strong competition from well-established and successful large firms that dominate the space and their competitive and wide-ranging product and service offerings, including premium and mass market.
For new companies with similar offerings, breaking into an oligopoly is a challenge. The only firms that typically manage to do so are those with significant funding; an oligopolistic market requires large amounts of capital to operate in because the inherent economies of scale built by oligopolies generally ensure that they have a production cost advantage.
Oligopolies form when several dominant companies rule over a particular market or industry, making collaboration and partnerships possible between the firms that exist within them. While an oligopolistic setup can be incredibly beneficial for companies already existing in the marketplace, they are equally as hard to break into for new companies without substantial funds.
We hope you enjoyed reading CFI’s explanation of oligopolistic markets, industries, and companies. The following CFI resources will be helpful in furthering your financial education:
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