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What Is An Oligopoly And Does It Affect You?

Larry Davidson - June 08, 2018

Oligopoly: Explained

Before entering a business space, one measures risk and competition. An oligopoly offers tremendous upside potential with limited competition.

What Is An Oligopoly?

A Few Firms Dominate The Industry In An Oligopoly

Unlike a monopoly, an oligopoly has a few businesses in the industry. However, this does not imply perfect competition. In fact, only a few industries dominate in a an oligopoly.  These firms cannot keep others from strongly influencing business practices of others. Also, no real upper limit exists to number of firms in an oligopoly.

For example, businesses with the largest market share tend to dictate industry trends. This makes oligopoly the most common market structure. The clearest example lies with auto manufacturers. This industry has significant startup costs and product differentiation. For these reasons, only a few firms dominate the industry, such as Ford, Honda, Toyota, etc.

Analyzing Oligopolies

How does this business structure succeed? First, we look at what defines an oligopoly. Characteristics include dependency on other firms, barriers to entry, and differentiated products. Companies affect other companies based on pricing and production numbers. Competitors often undercut one another with discounts or promotions. This causes a reaction by others in the space. Barriers to entry exist in this structure, meaning not just any old shop can open and immediately take market share. These businesses often have significant startup costs and brand loyalty. Lastly, companies compete on a non-price basis. This means that product quality and customer satisfaction keep consumers coming back, not necessarily bargains.

Furthermore, this structure gives these dominant firms different strategic options. Firms either concentrate on products, which leaves price out of the equation. Conversely, discount retailers often start price wars, looking for consumers who are price conscious. Businesses also collude, meaning they work together, often leading prices higher and giving consumers no choice but to pay up.

Final Thoughts

Finally, oligopolies are the most common market structure. Think of coffee shops, tech giants, or steel manufacturers. This market structure works in consumer driven markets, and competition keeps checks and balances in place unlike monopolies.

Larry D. is one of the most experienced writers at the Dork. His expert insights into the individual stocks have made small fortunes for some of his readers and profitable trades for many more. Best known for his work with under-the-radar growth stocks, Larry has been picking winners for over 30 years.

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