An oligopoly is a market with a small number of sellers.
Oligopoly is a market dominated by a small number of supplying producers, called oligopolists ). The word has Greek origin and is made up of two concepts: oligo ( "few" ) and polio ( "seller" ). Therefore, oligopoly precisely means "few sellers."
Since there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one businessman, in this way, affect the decisions of others. Oligopolists take advantage of their privileged position to generate higher prices and less production. These types of companies collaborate with each other , in order to maintain said power and avoid competition.
Characteristics of an oligopoly
When it comes to talking fully about what an oligopoly is, it is essential that we know the main hallmarks or characteristics that define it. Thus, it should be emphasized that it has two types of goods produced: the differentiated ones , which are the processed products, and the homogeneous ones , the raw materials.
In the same way, an oligopoly is identified by the fact that in its environment competition does not exist as such since a limited number of companies operate there, which are the ones that have absolute control and dominion over it.
The third hallmark that characterizes a business organization of this type is the fact that it frequently relies on its own resources in terms of advertising and marketing.
And finally the fourth property that we find in it is the very common use of what is known as dumping . What this consists of is directly lowering prices even below production costs, to obtain benefits since, as we have mentioned previously, competition does not exist.
However, it is also important to emphasize that a hallmark that oligopolies have and that is not precisely in their favor is the fact that they make it difficult and prevent the entry of new companies into it. Among the sectors where it is most common to talk about oligopolies is oil or electrical energy.
In an oligopoly, companies enjoy a privileged position to maximize their profits.
Its operation
The functioning of an oligopoly can be explained using Game Theory methods. Given the cost functions of the companies involved, each one will offer its products at a certain price and with a specific quantity. Buyers will determine what quantity is actually demanded for each company and give producers a certain level of profit .
Producers can also try to differentiate their products from those of other companies, so that consumers choose them.
Game Theory refers to the fact that the decisions of each producer depend in turn on the decisions of the competition. This is usually represented by a reaction curve . If the hypothetical situation arose that the reaction curves of all the companies crossed at a certain point, this set of decisions would imply the equilibrium of the game .