Oligopoly

Last Updated On -11 Jul 2025

Oligopoly is a market arrangement that is somewhere between perfect competition and monopoly. It is complicated and continually changing. It talks about a market where a few big companies are in charge and can set pricing and make important choices. In an oligopoly, companies depend on each other, operate together in a smart way, and are aware of what the others are doing. In perfect competition, no one company can change the market. One company runs a monopoly.

Oligopoly has a big effect on prices, new products, and what people desire in a lot of businesses, such as telephones, airplanes, cars, and fast-moving consumer goods (FMCG). Lawmakers, economists, and company owners need to know how it works.

What is Oligopoly?

In an oligopoly, only a few big companies make the same or different goods in the same market. One organization's actions have a huge effect on the others, which means they rely on each other a lot. These companies are big enough to affect the market, and they always keep an eye on what the others are doing, including cutting prices, releasing new products, or running ads.

Prices don't change in oligopolistic marketplaces, competition isn't focused on price, and sometimes companies work together to control prices or output and make more money.

Key Features of an Oligopoly

Setting prices, colluding, or limiting output are all ways to abuse oligopoly power that can hurt customers and go against the rules of competition. Governments frequently keep an eye on and control oligopolistic marketplaces to stop unfair behavior. Companies should be careful not to look like they don't want to compete, even when they are working together legally.

1. Lots of buyers, but not many sellers

There are just a few big companies in charge, but many smaller ones are very close to being in charge. These few companies control a lot of the market.

2. Trusting each other

Businesses need to think ahead since the decisions they make might have an effect on the whole market. A pricing war could emerge if one company cuts its prices and others do the same.

3. Things that make it hard to get in

New firms have a hard time breaking in because there are large barriers to entry, people are loyal to brands, they can't do certain things because of restrictions, and they can't grow as quickly as they want. This gives power to businesses that are already there.

4. If the products are the same or not

Some products are the same, like crude oil from big companies, but others, like the smartphones that Apple, Samsung, and Xiaomi create, are different.

5. Prices that stay the same

Companies don't want to adjust their prices too regularly. They don't compete on price, but they do compete in other ways, such as through packaging, promotion, and customer service. The kinked demand curve theory explains why prices don't change much under an oligopoly.

6. The chance of collusion

Companies may cooperate together to set prices or output, just like OPEC does. This makes more money, yet it is against the law or limited by antitrust restrictions.

Key Types of Oligopoly

An oligopoly can be seen in the Indian telecom market. The three biggest companies in the sector right now are Reliance Jio, Bharti Airtel, and Vodafone Idea. This is because some businesses have joined forces and others have gone. Every business keeps a careful eye on the prices, data plans, and marketing efforts of its rivals. When one operator lowers its prices, other operators usually do the same. This shows that they depend on one another and make sensible choices, which is common in an oligopoly.

1. Collusive Oligopoly

Companies agree to work together instead of competing with each other. They might agree on prices or split up the markets. This makes things less random, but it hurts people who buy items.

2. Non-Collusive Oligopoly

Companies try to outdo one another and discover how their competitors will react. People use game theory and price leadership models to decide what to do next.

3. Open Oligopoly

There is more competition amongst companies, and they don't have a formal agreement.

4. Closed Oligopoly

Companies work together, either officially or unofficially, to form a cartel that is either open or secret.

Did you know?

The "prisoner's dilemma" in game theory is one of the most well-known examples of oligopoly behavior in real life. This means that businesses that do what's best for them, even if they don't have a contract, could wind up in a worse condition than if they had worked together.

Frequently Asked Questions (FAQs)

What does oligopoly do to people who buy things?

When companies compete honestly, oligopoly can lead to stable prices, more innovative items, and more availability. But if companies gather together and establish prices, it might imply higher prices and fewer choices, which would be terrible for customers in the long term.

What does the kinked demand curve signify in an oligopoly?

The kinked demand curve idea suggests that businesses in an oligopoly don't want to raise or lower their pricing. If one company raises its rates, other companies may not do the same, which could mean they lose business. But if one business cuts its pricing, all of its competitors will do the same, which would start a price war that damages everyone. This maintains prices the same even when costs go up.

What are the differences between perfect competition, oligopoly, and monopoly?

An oligopoly has fewer suppliers than a monopoly or full competition. An oligopoly also has more market power, which makes it difficult for new enterprises to get in. In a market that is entirely competitive, there are a lot of little businesses that can't establish prices, and new businesses can join at any time. A company that has a monopoly controls the whole market, sets prices, and makes it exceedingly hard for other enterprises to start up. Oligopoly is in the center because a small number of companies dominate the market and may determine prices. New firms have a hard time getting started because they have to spend a lot of money, be dedicated to their brand, or follow government rules. It's really important to choose your strategy carefully when you work with companies in an oligopoly.