A market structure in which only a few enterprises can prevent everyone else from exerting large effect is called an oligopoly. It is a type of “imperfect competition” in which a company’s actions have a considerable impact on the actions of other companies in the market.No single company has a lot of market power in an oligopoly.
Moreover, new competitors entering an oligopolistic market face too many challenges as existing oligopolies provide well-established goods through well-established distribution channels. As a result, going through an oligopolistic industry requires a substantial amount of money as economies of scale nearly imply that the industry status quo will not change.
With this, no single company can raise its pricing beyond what would be the case in a perfect competition environment. To raise prices and realize a bigger economic profit in an oligopoly, all companies would have to cooperate. The majority of oligopolies emerge in businesses where products are basically homogenous and provide consumers with essentially the same value.
Oligopolies have price control, making it more difficult for new enterprises to enter the market. As a result, they avoid the formation of new competitors that may pose a threat to their operations. New firms can charge lower pricing, putting the collaborating firms’ revenues in danger.
Characteristics of an oligopoly:
- Products being soldare homogeneous or differentiated.
- There are a lot of buyers but there are only a small number of sellers.
- There are numerous entry barriers that make it very difficult for new businesses to enter the market.
- There is mutual interdependence among the businessesin making decisions.