Oligopoly Definition with Example
Oligopoly Definition – “It refers to a market situation where few firms control the entire market”
In simple words, when the market share is shared by few firms and the entire market is controlled by them. Oligopoly is a market structure where the few firms decide the price.
Characteristics of Oligopoly Market
Interdependence – In this market, each and every firm is dependent on each other. They take each and every decision mutually. So there is greater extent of interdependence.
Strategy – As in oligopoly few firms dominate the whole market, if any of the firm make any strategy such as reduce the price, then it will effect the other operating firms as well. So firms always keep close watch over their rivals.
Entry Barrier – This type of market is characterized with entry barriers. This means that, the firm already operating in this market try to create hurdles for the new firms or new players who are thinking of entering the market.
However, instead of competing with each other, firms in this market collude with other firms in the market. This results in shifting the oligopoly market mechanism to monopoly. Ultimately, it leads to abnormal profits for the colluded group of firms also known as cartel.
Types of Collusion or Cartel
Overt – In overt collusion, firms enter into agreement openly and declare themselves an association.
Covert – It is the opposite of overt. Here firms tries to hide the agreement because of the presence of regulators in the market.
Tacit – In this form of collusion, firm do not enter into any kind of agreement, but they act together as if they are in agreement with each other.
To understand the oligopoly definition, let’s discuss an example . The best example of oligopoly is the cartel formed by the Petroleum selling countries. These countries form a cartel and decide the price of the petrol mutually. If these firms do not have enter into collusive oligopoly, then each country would quote a different price. So the country that is offering the lowest will be preferred more by the entire world. This could have led to losses to other countries. So these firms come together and fix a same price.