An oligopoly is like a flaw in our antitrust or antimonopoly legislation. This is because a monopolized market is more or less shared between a small number of companies; together, these companies, which control the market, form an oligopoly.
Needless to say, an oligopoly is far from a perfect market and with it comes a number of interesting characteristics, most of them whittled to fine points by the friction of intense competition on one side and inter-reliance on the other. Still, these are problems every business would love to have. We take a closer look at what makes an oligopoly tick below, but in the meantime check out this Mobile Monopoly course on how to take advantage of the mobile market.
A Brief Definition
To give you a better idea of what an oligopoly is, let’s look at the three defining characteristics:
- A small number of big players. In other words, if there are three salmon markets in Juneau, AK, and they are controlling and competing over the local market, that is not an oligopoly. The firms need to be large so that they can truly protect the market; no small newcomers allowed. An oligopoly would be more akin to Exxon, BP and Shell Oil.
- Identical or differentiated products. These are not synonymous. An identical product oligopoly would be one in which the products are – and kind of have to be – truly identical: timber, oil, steel, coal, etc. A differentiated product would be very similar products or services that offer the consumer variation: Home Depot vs. Lowe’s, or BMW vs. Audi, or Apple vs. Samsung, etc. Learn how economic variables impact industries with this great course on Micro and Macro Economics.
- Barred doors. Or, barriers to entry. In other words, the companies that are a part of an oligopoly have certain rights or ownerships that make it all but impossible for another company to get their foot in the door. They companies are so big, powerful and protected by the law, that they cannot be dethroned. For example, these companies may all have exclusive copyrights (Apple), or access to resources (Exxon), or the market may have been developing for so long that unless you got in at the beginning, it would simply be too expensive to start now (BMW).
1. Characteristics Of Oligopolies (COO): Do Not Pass Go
Obviously an oligopoly is not a monopoly or it would be called such, but they can be extremely similar. This is especially true when the products are not identical but are differentiated. It might seem like it should be the other way around, but when the products are variations of each other, each firm has a particularly large share of the market (their own loyal customers; for example, people who are partial to BMWs). In this way they can control price and production almost to the extent of a true monopoly.
2. COO: With A Little Help From My “Friends”
In a surprising turn of events, the companies involved in an oligopoly are dependent upon each other. Of course, they don’t have to be, but time has proven that all the companies benefit from a little interdependence. This is because the market is still competitive and even minuscule changes in product or price can adversely affect the other companies; then the other companies will try to lower their prices by a more substantial margin, or develop improved technology, or whatever.
So you can see how it would be difficult to make decisions without first considering how it will affect the other companies (and, more importantly, the extent to which they will go to regain a competitive edge). Whether you’re a big company or a small one, you can benefit from this post on 7 competitive positioning tips and strategies.
3. COO: Advertising Like It’s 1999
Only in business can interdependence and deathly serious competition co-exist. Advertising is something that the biggest companies will spend hundreds of millions of dollars on annually. Coca-Cola, which you would think is above advertising, spent $2.9 billion on advertising in 2010 (2013 numbers unavailable).
The reasons for this are ultimately simple. Our economy is structured so that it is not successful unless it achieves constant growth (I’m not saying this is a good thing). Therefore advertising plays a large role in increasing Coca-Cola’s market share and overall sales (the latter being further achieved by selling costs).
Technically, a true monopoly would not need to bother with advertising or selling costs. But in an oligopoly both are absolute necessities. Avoid making the wrong advertising decisions with this awesome class on the top 5 marketing mistakes businesses make.
4. COO: Price Point
As you would expect, it benefits all the companies in an oligopoly if there is little variation in price. If you get into a price reducing war, all the companies will quickly hit the bottom of the price barrel. Then there will be no room for flexibility and the profit margins will be unfavorable, to say the least.
This is a result of dependence, as well. While completely illegal, it would be unwise for one of the companies to make a price cut without consulting with the others. Nobody wants to get sucked into a bidding war for the lowest price.
5. COO: Demand
Finally, even though all the companies have a dominating position in the market, they are all nervous to a degree and obsessed with forecasting changes to the market; pricing, demand, etc. It is very difficult to anticipate what other companies will do when changes inevitably happen.
One of the things that becomes truly uncertain is the demand curve. How does the demand curve change when quantity changes? How does it change when price changes? How about when the quantities and prices change at a variety of levels? All of these things become impossible to determine because each company has both enormous control of the market yet also enormous dependence on the other companies.
If you’re looking for a great place to establish yourself and (who knows?) work your way into an oligopoly, check out this five-star Market Research class on how to tap into the most profitable markets.