GROUP 4

Bartolome, Narleen
Cabatuan, Keith
Carbonelle, Merlie
Cardona, Glenn
Celis, Katrina
Dayrit, Charlene
Garcia, Lanz
Lawan, Lyka

Leal, Nicole

Ponce, Stephanie

Razon, Karen

Tolenada, Mark

OLIGOPOLY
 An oligopoly is a market characterized by a small number of firms who realize they are
interdependent in their pricing. The few large firms compete with each other and there is
an element of interdependence in terms of decision making of these firms.
 Derived from the Greek word, ‘oligo’ (few) ‘polo’ (to sell).
 Which means, Oligopoly is a market dominated by a few large firms, that has a high
barrier to entry, and is controlled by a few large companies.
 Oligopolies are all over the place. In fact, their products are likely in front of you right
now. The laptop, computer market is dominated by companies like HP, Dell, and Apple.
And the majority of mobile phones are produced by Apple, Samsung and LG.
 You also see this type of thing in market for cars, air travel, movies, candy, and game
consoles.
Characteristics of Oligopoly:

 Few firms, large number of potential buyers but only a few sellers
 Either standard, homogenous or differentiated products
 Difficult to entry
 Interdependence
Barriers to entry:
1. Access to suppliers and distributors
2. Cost of entering a market
3. Legal requirements
4. Legal restrictions
5. Fear of retaliation

Types of Oligopoly
 1. Pure oligopoly – have a homogenous product. Pure because the only source of market
power is lack of competition.
 An example of a pure oligopoly would be the steel industry, which has only a
few producers but who produce exactly the same product.
 Another definition from other source: If the firms produce homogenous products,
then it is called pure or perfect oligopoly. Though, it is rare to find pure oligopoly
situation, yet, cement, steel, aluminum and chemicals producing industries
approach pure oligopoly.
2. Impure oligopoly – have a differentiated product. Impure because have both lack of
competition and product differentiation as sources of market power.
 An example of an impure oligopoly is the automobile industry, which has only a
few producers who produce a differentiated product.
 Another definition from other source: If the firms produce differentiated
products, then it is called differentiated or imperfect oligopoly. For example,
passenger cars, cigarettes or soft drinks. The goods produced by different firms
have their own distinguishing characteristics, yet all of them are close substitutes
of each other.
3. Collusive Oligopoly
If the firms cooperate with each other in determining price or output or both, it is called collusive
oligopoly or cooperative oligopoly. In other words, the firms in collusive oligopoly combines to
avoid the competition among themselves regarding price and output of the industry. For example,
OPEC (Organization for petroleum exporting countries) serves the example for collusive
oligopolies.

 Cartel – is a group of independent market participants who collude with each other in
order to improve their profits and dominate the market. Cartels are usually associations in
the same sphere of business, and thus an alliance of rivals.

4. Non-collusive Oligopoly
If firms in an oligopoly market compete with each other, it is called a non-collusive or non-
cooperative oligopoly. The firms in non-collusive oligopoly tries to gain maximum share of the
market by developing policies and strategies to outperform or beat their rivals.

5. Open Oligopoly
An open oligopoly provides full freedom to new firms to enter into industry. In the situation of
open oligopoly there is no restriction of any kind for the desiring firm to enter into the market.

6. Closed Oligopoly
A closure oligopoly refers to that market structure where only few firms control the market and
new firms are not allowed to enter industry. Barriers are set to prevent the entry of new firms into
the industry. For example, patients, licenses, requirement of large capital, control over crucial raw
materials are some of the reasons which prevent new firms from entering into industry.
Why do oligopolies exist?
The biggest reason why oligopolies exist is collaboration. Firms see more economic benefits in
collaborating on a specific price than in trying to compete with their competitors. By controlling
prices, oligopolies are able to raise their barriers to entry and protect themselves from new
potential entrants into the market. This is quite important, as new firms may offer much lower
prices and thus jeopardize the longevity of the colluding firms’ profits.

In most markets, antitrust laws exist that aim to prevent price collusion and protect consumers.
Nonetheless, firms have devised ways to achieve price collusion without being detected by
regulators. For example, firms might elect a price leader that is tasked with leading changes in
prices before other firms follow suit in order to “react to competition.” Firms may also agree to
change their prices on specific dates; in such cases, the changes may be seen as merely a reaction
to economic conditions such as fluctuations in inflation.

Example of Oligopoly:
1. Smart Phone Operating Systems
The smart phone market is similarly dominated by a handful of companies, the most powerful
two being Google Android and Apple IOS. Those companies have deep relationships with the
handset providers and are able to have their system pre-installed on each phone.
2. Computer Operating Systems
New high tech markets can become oligopolies when the companies provide unique products that
are supported by an ecosystem of supporting technology. Computer operating systems are
dominated by Microsoft’s Windows, Apple’s Mac OS and the open source Linux operating
systems. These three systems capture close to 100% of the computer operating system market due
to their established positions. According to the StatOwl website.
3. Music Industry
The music entertainment industry is dominated by four music companies that control 80% of the
market and these are universal Music Group, Sony Music entertainment, Warner Music Group.
4. Auto Industry
Auto industry is another example of an oligopoly, which is dominated by few firms and these
firms are Hero Motor Corps., TVS and Honda.
 Hero: 40% Market share
 Honda: 25% Market share
 TVS: 14% Market share

5. Oligopoly in soft drinks industry

Two firms control 74% of soft drinks sales:

 42.8% Coca-Cola’s 25 brands and 139 varieties.

 31.1% Pepsi’s 18 brands and 163 varieties.
Coca-Cola and Pepsi are in an oligopoly market. They are mutually and strategically
interdependent, as a decision made one firm invariably affects the other. They are selling the
homogenous product so they can control over price.

Some other common examples:

 Airlines
 Supermarkets
 Steel industry
 Health insurance, etc.

Positive and Negative Effects of Oligopoly

Are oligopolies good or bad?
Positive effects
1. An oligopoly can adopt a competitive strategy.
2. The extra profits earned from an oligopoly can go into research and development.
3. It can bring price stability to the market.
4. Oligopolies can offer more information to their consumers.
5. It allows for more product refinement to occur.
Negative effects
1. Higher concentration levels reduce consumer choice.
2. It can lead to decision-making bias and irrational behavior.
3. An oligopoly does not require efficiencies to be useful.
4. Companies can add fees and charges because there is no competition.
5. It creates the appearance of choice without really giving you one.
References:

 [Link]
 [Link]
 [Link]
 [Link]
 [Link]
economics-terms-and-concepts/oligopoly
 [Link]
%[Link]
 [Link]
 [Link]
 [Link]
 [Link]