Oligopoly

A few firms dominating an industry and competing against each other for the market share. Oligopoly is a Greek word meaning, in approximate translation, “few sellers.” Oligopoly is generally described as competition among a few firms in the same industry. In the United States, three or four firms dominate some industries. For example, for more than a century the automobile industry was dominated by three American car companies. In addition, many other industries, such as oil, gas, steel, food, and beverages, are oligopolistic in nature. Firms operating in an oligopolistic market react when one firm cuts its prices for an identical good. In addition, they react to changes in quality and other technological improvements and improvement in the safety of products. An oligopolist strategy is based on how a firm thinks its competitor will react to any changes in pricing, advertising, marketing, and distribution. In oligopolistic competition, price and output are not totally determined by supply and demand. There is one key factor that influences the determination of prices and output—the reaction of one oligopoly to another. Models have been developed to measure how firms react to each other. A very popular model is game theory, which is widely used in explaining and predicting oligopolistic behavior. Some oligopolies produce and sell identical goods. For example, Exxon and Mobil produce and sell oil, and their products are undifferentiated from each other. Some oligopolies produce and sell similar products but differentiate these products from each other by product features, style, technology, and quality. For example, Ford sells the Mercury Sable and competes against Nissan on price, features, and functionality. However, Nissan competes on quality and reliability. The prices of similar products are more sensitive to any changes in a competitor's price. If an oligopoly raises its price for an identical good, customers will switch to another competitor's product because the products are identical. For more information, see McEachern (2006).