case study on oligopoly

Introduction to Monopolistic Competition and Oligopoly

Chapter objectives.

In this chapter, you will learn about:

• Monopolistic Competition

Bring It Home

The temptation to defy the law.

Laundry detergent and bags of ice—products of industries that seem pretty mundane, maybe even boring. Hardly! Both have been the center of clandestine meetings and secret deals worthy of a spy novel. In France, between 1997 and 2004, the top four laundry detergent producers (Proctor & Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market. Officials from the soap firms were meeting secretly, in out-of-the-way, small cafés around Paris. Their goals: Stamp out competition and set prices.

Around the same time, the top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler’s Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market.

If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a monopoly—and enjoy monopoly-size profits. The problem? In many parts of the world, including the European Union and the United States, it is illegal for firms to divide markets and set prices collaboratively.

These two cases provide examples of markets that are characterized neither as perfect competition nor monopoly. Instead, these firms are competing in market structures that lie between the extremes of monopoly and perfect competition. How do they behave? Why do they exist? We will revisit this case later, to find out what happened.

Perfect competition and monopoly are at opposite ends of the competition spectrum. A perfectly competitive market has many firms selling identical products, who all act as price takers in the face of the competition. If you recall, price takers are firms that have no market power. They simply have to take the market price as given.

Monopoly arises when a single firm sells a product for which there are no close substitutes. We consider Microsoft, for instance, as a monopoly because it dominates the operating systems market.

What about the vast majority of real world firms and organizations that fall between these extremes, firms that we could describe as imperfectly competitive ? What determines their behavior? They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly. What will they do?

One type of imperfectly competitive market is monopolistic competition . Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. Consider, as an example, the Mall of America in Minnesota, the largest shopping mall in the United States. In 2010, the Mall of America had 24 stores that sold women’s “ready-to-wear” clothing (like Ann Taylor and Urban Outfitters), another 50 stores that sold clothing for both men and women (like Banana Republic, J. Crew, and Nordstrom’s), plus 14 more stores that sold women’s specialty clothing (like Motherhood Maternity and Victoria’s Secret). Most of the markets that consumers encounter at the retail level are monopolistically competitive.

The other type of imperfectly competitive market is oligopoly . Oligopolistic markets are those which a small number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition.

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• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/10-introduction-to-monopolistic-competition-and-oligopoly

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18 Models of Oligopoly: Cournot, Bertrand, and Stackelberg

Cournot, Bertrand, and Stackelberg

The Policy Question How Should the Government Have Responded to Big Oil Company Mergers?

Exploring the policy question.

• How do oil companies compete—on quantities or prices?
• What policy solutions present themselves from this analysis?

Learning Objectives

18.1 cournot model of oligopoly: quantity setters.

Learning Objective 18.1 : Describe how oligopolist firms that choose quantities can be modeled using game theory.

18.2 Bertrand Model of Oligopoly: Price Setters

Learning Objective 18.2 : Describe how oligopolist firms that choose prices can be modeled using game theory.

18.3 Stackelberg Model of Oligopoly: First-Mover Advantage

Learning Objective 18.3 : Describe the different outcomes when oligopolist firms choose quantities sequentially.

18.4 Policy Example How Should the Government Have Responded to Big Oil Company Mergers?

Learning Objective 18.4 : Explain how models of oligopoly can help us understand how to respond to proposed mergers of oil companies that sell retail gas.

Oligopoly markets are markets in which only a few firms compete, where firms produce homogeneous or differentiated products, and where barriers to entry exist that may be natural or constructed. There are three main models of oligopoly markets, and each is considered a slightly different competitive environment. The Cournot model considers firms that make an identical product and make output decisions simultaneously. The Bertrand model considers firms that make an identical product but compete on price and make their pricing decisions simultaneously. The Stackelberg model considers quantity-setting firms with an identical product that make output decisions simultaneously. This chapter considers all three in order, beginning with the Cournot model.

Oligopolists face downward-sloping demand curves, which means that price is a function of the total quantity produced, which, in turn, implies that one firm’s output affects not only the price it receives for its output but the price its competitors receive as well. This creates a strategic environment where one firm’s profit maximizing output level is a function of its competitors’ output levels. The model we use to analyze this is one first introduced by French economist and mathematician Antoine Augustin Cournot in 1838. Interestingly, the solution to the Cournot model is the same as the more general Nash equilibrium concept introduced by John Nash in 1949 and the one used to solve for equilibrium in non-cooperative games in chapter 17 .

We will start by considering the simplest situation: two companies that make an identical product and that have the same cost function. Later we will explore what happens when we relax those assumptions and allow more firms, differentiated products, and different cost functions.

Let’s begin by considering a situation where there are two oil refineries located in the Denver, Colorado, area that are the only two providers of gasoline for the Rocky Mountain regional wholesale market. We’ll call them Federal Gas and National Gas. The gas they produce is identical, and they each decide independently—and without knowing the other’s choice—the quantity of gas to produce for the week at the beginning of each week. We will call Federal’s output choice [latex]q_F[/latex] and National’s output choice [latex]q_N[/latex], where [latex]q[/latex] represents liters of gasoline. The weekly demand for wholesale gas in the Rocky Mountain region is [latex]P=A—BQ[/latex], where [latex]Q[/latex] is the total quantity of gas supplied by the two firms, or [latex]Q=q_F+q_N[/latex]. Immediately, you can see the strategic component: the price they both receive for their gas is a function of each company’s output. We will assume that each liter of gas produced costs the company c, or that c is the marginal cost of producing a liter of gas for both companies and that there are no fixed costs.

If the profit function is [latex]\pi_F[/latex][latex]=[/latex] [latex]q_F(A-B(q_F+q_N)-c)[/latex] , then we can find the optimal output level by solving for the stationary point, or solving

[latex]\frac{\partial \pi_F}{\partial q_F}[/latex] [latex]=[/latex] [latex]_0[/latex]

If [latex]\pi_F=[/latex] [latex]q_F(A-B(q_F+q_N)-c)[/latex] , then we can expand to find

[latex]\pi_F[/latex] [latex]=[/latex][latex]Aq_F-Bq[/latex] [latex]\frac{F}{2}[/latex] [latex]-Bq_Fq_N-cq_F[/latex]

Taking the partial derivative of this expression with respect to [latex]q_F[/latex] ,

[latex]\frac{\partial \pi_F}{\partial q_F}[/latex] [latex]=[/latex][latex]A-2Bq_F-Bq_N-c[/latex] [latex]=[/latex] [latex]_0[/latex]

If we rearrange this, we can see that this is simply an expression of [latex]MR=MC[/latex] .

[latex]A-2Bq_F-Bq_N[/latex][latex]=[/latex][latex]c[/latex]

The marginal revenue looks the same as a monopolist’s [latex]MR[/latex] function but with one additional term, [latex]-[/latex] [latex]Bq_N[/latex] .

Solving for [latex]q_F[/latex] yields

[latex]q_F=[/latex] [latex]\frac{A-Bq_N-c}{2B}[/latex] ,

[latex]q^*_F=[/latex] [latex]\frac{A-c}{2B}-\frac{1}{2}[/latex] [latex]qN[/latex]

This is Federal Gas’s best response function, their profit maximizing output level given the output choice of their rivals. It is the same best response function as the ones in chapter 17 . By symmetry, National Gas has an identical best response function:

[latex]q^*_N=[/latex] [latex]\frac{A-c}{2B}-\frac{1}{2}[/latex] [latex]qF[/latex]

With these assumptions in place, we can express Federal’s profit function:

[latex]\pi_F=P \times q_F—c \times q_F = q_F (P-c)[/latex]

Substituting the inverse demand curve, we arrive at the expression

[latex]\pi_F=q_F(A-BQ-c)[/latex].

Substituting [latex]Q=q_A+q_B[/latex] yields

[latex]\pi_F=q_F(A-B(q_F+q_N)-c)[/latex].

The expression for National is symmetric:

[latex]\pi_N=q_N(A-B(q_N+q_F)-c)[/latex]

Note that we have now described a game complete with players, Federal and National; strategies, [latex]q_F[/latex] and [latex]q_N[/latex]; and payoffs, [latex]\pi_F[/latex] and [latex]\pi_N[/latex]. Now the task is to search for the equilibrium of the game. To do so, we have to begin with a best response function. In this case, the best response is the firm’s profit maximizing output. This will depend on both the firm’s own output and the competing firm’s output.

We know from chapter 15 that the monopolists’ marginal revenue curve when facing an inverse demand curve [latex]P=A-BQ[/latex] is [latex]MR(q)=A-2Bq[/latex]. This duopolistic example shows that the firms’ marginal revenue curves include one extra term:

[latex]MR_F(q_F)=A-2Bq_F-Bq_N[/latex] and [latex]MR_N(q_N)=A-2Bq_N-Bq_F[/latex]

The profit maximizing rule tells us that to find the profit maximizing output, we must set the marginal revenue to the marginal cost and solve. Doing so yields

[latex]q^*_F=\frac{A-c}{2B}-\frac{1}{2}qN[/latex]

for Federal Gas and

[latex]q^*_N=\frac{A-c}{2B}-\frac{1}{2}qF[/latex]

for National Gas. These are the firms’ best response functions, their profit maximizing output levels given the output choice of their rivals.

Now that we know the best response functions, solving for equilibrium in the model is relatively straightforward. We can begin by graphing the best response functions. These graphical illustrations of the best response functions are called reaction curves. A Nash equilibrium is a correspondence of best response functions, which is the same as a crossing of the reaction curves.

In figure 18.1 , we can see the Nash equilibrium of the Cournot duopoly model as the intersection of the reaction curves. Mathematically, this intersection is found by simultaneously solving

[latex]q^*_F=\frac{A-c}{2B}-\frac{1}{2}q_N[/latex] and [latex]q^*_F=\frac{A-c}{2B}-\frac{1}{2}q_F[/latex]

This is a system of two equations and two unknowns and therefore has a unique solution as long as the slopes are not equal. We can solve these by substituting one equation into the other, which yields a single equation with a single unknown:

[latex]q^*_F=\frac{A-c}{2B}-\frac{1}{2}[\frac{A-c}{2B}-\frac{1}{2}q_F][/latex]

Solving this by steps results in the following:

[latex]q^*_F=\frac{A-c}{2B}-\frac{A-c}{4B}+\frac{1}{4}q_F[/latex][latex]\frac{3}{4}q^*_F=\frac{A-c}{4B}[/latex] [latex]q^*_F=\frac{A-c}{3B}[/latex]

And by symmetry, we know that the two optimal quantities are the same:

[latex]q^*_N=\frac{A-c}{3B}[/latex]

The Nash equilibrium is

[latex](q^*_F,q^*_N)[/latex]

[latex](\frac{A-c}{3B}, \frac{A-c}{3B})[/latex].

Let’s consider a specific example. Suppose in the above example, the weekly demand curve for wholesale gas in the Rocky Mountain region is

[latex]p = 1,000 − 2Q[/latex], in thousands of gallons

Both firms have constant marginal costs of 400. In this case,

[latex]A = 1,000[/latex], [latex]B = 2[/latex] and [latex]C = 400[/latex].

[latex]q^*_F=\frac{A-c}{3B}=\frac{1,000 − 400}{(3)(2)}=\frac{600}{6}=100[/latex]

By symmetry, we know

[latex]q^*_N=100[/latex]

as well. So both Federal Gas and National Gas produce 100,000 gallons of gasoline a week. Total output is the sum of the two and is 200,000 gallons. The price is [latex]p= 1,000 − 2(200) = $600[/latex] for 1,000 gallons of gas, or $0.60 a gallon.

To analyze this from the beginning, we can set up the total revenue function for Federal Gas:

[latex]TR(q_F)=p×q_F[/latex] [latex]=(1,000 − 2Q)q_F[/latex] [latex]=(1,000 − 2q_F-2q_N)q_F[/latex] [latex]= 1,000 − 2q \frac{2}{F}-2q_Fq_N[/latex]

The marginal revenue function that is associated with this is

[latex]MR(q_F)=1,000 − 4q_F-2q_N[/latex].

We know marginal cost is 400, so setting marginal revenue equal to marginal cost results in the following expression:

[latex]1,000 − 4q_F-2q_N=400[/latex]

Solving for [latex]q_F[/latex] results in the following:

[latex]q_F=\frac{600 − 2q_N}{4}[/latex] [latex]q^*_F=150-\frac{q_F}{2}[/latex]

This is the best response function for Federal Gas. By symmetry, we know that National Gas has the same best response function:

[latex]q^*_N=150-\frac{q_F}{2}[/latex]

Solving for the Nash equilibrium, we get the following:

[latex]q^*_N=150-\frac{q_F}{2}[/latex] [latex]q^*_F=150 − 75+\frac{q_F}{4}[/latex] [latex]/frac{3}{4}q^*_F=25[/latex] [latex]q^*_F=100[/latex]

We can insert the solution for [latex]q_F[/latex] into [latex]q^*_N[/latex]:

[latex]q^*_N=150-\frac{(100)}{2}=100[/latex]

In the previous section, we studied oligopolists that make an identical good and who compete by setting quantities. The example we used in that section was wholesale gasoline, where the market sets a price that equates supply and demand and the strategic decision of the refiners was how much oil to refine into gasoline. In this section, we turn our attention to a different situation in which the oligopolists compete on price. The example here is the retail gas stations that bought the wholesale gas from the refiners and are now ready to sell it to consumers. We still have identical goods; for consumers, the gas that goes into their cars is all the same, and we will assume away any other differences like cleaner stations or the presence of a mini-mart.

Let’s imagine a simple situation where there are two gas stations, Fast Gas and Speedy Gas, on either side of a busy main street. Both stations have large signs that display the gas prices that each station is offering for the day. Consumers are assumed to be indifferent about the gas or the stations, so they will go to the station that is offering the lower price. So an individual gas station’s demand is conditional on its relative price with the other station.

Formally, we can express this with the following demand function for Fast Gas:

[latex]Q_F \left\{\begin{matrix} & & & \\ a-bP_F \text{ if }P_F P_F \end{matrix}\right.[/latex]

Speedy Gas has an equivalent demand curve:

[latex]Q_S \left\{\begin{matrix} & & & \\ a-bP_S \text{ if }P_S P_F \end{matrix}\right.[/latex]

In other words, these demand curves say that if a station has a lower price than the other, they will get all the demand at that price, and the other station will get no demand. If they have the same price, then each will get one-half of the demand at that price.

Let’s assume that Fast Gas and Speedy Gas both have the same constant marginal cost of [latex]c[/latex] and no fixed costs to keep the analysis simple. The question we now have to answer is, What are the best response functions for the two stations? Remember that best response functions are one player’s optimal strategy choice given the strategy choice of the other player. So what is Fast Gas’s best response to Speedy Gas’s price?

If Speedy Gas charges

[latex]P_S \gt c[/latex]

Fast Gas can set [latex]P_F \gt P_S[/latex] and they will get no customers at all and make a profit of zero. Fast Gas could instead set

[latex]P_F=P_S[/latex]

and get [latex]\frac{1}{2}[/latex] the demand at that price and make a positive profit. Or they could set

[latex]P_F=P_S −$0.01[/latex]

or set their price one cent below Speedy Gas’s price and get all the customers at a price that is one cent below the price, at which they would get [latex]\frac{1}{2}[/latex] the demand.

Clearly, this third option is the one that yields the most profit. Now we just have to consider the case where [latex]P_S=c[/latex]. In this case, undercutting the price by one cent is not optimal because Fast Gas would get all the demand but would lose money on every gallon of gas sold, yielding negative profits. Setting

[latex]P_F=P_S=c[/latex]

would give them half the demand at a break-even price and would yield exactly zero profits.

The best response function we just described for Fast Gas is the same best response function for Speedy Gas. So where are the correspondences of best response functions? As long as the prices are above [latex]c[/latex], there is always an incentive for both stations to undercut each other’s price, so there is no equilibrium. But at [latex]P_F=P_S=c[/latex], both stations are playing their best response to each other simultaneously. So the unique Nash equilibrium to this game is

[latex]P_F=P_S=c[/latex].

What is particularly interesting about this is the fact that this is the same outcome that would have occurred if they were in a perfectly competitive market because competition would have driven prices down to marginal cost. So in a situation where competition is based on price and the good is relatively homogeneous, as few as two firms can drive the market to an efficient outcome.

Both the Cournot model and the Bertrand model assume simultaneous move games. This makes sense when one firm has to make a strategic decision before knowing about the strategy choice of the other firm. But not all situations are like this. What happens when one firm makes its strategic decision first and the other firm chooses second? This is the situation described by the Stackelberg model, where the firms are quantity setters selling homogenous goods.

Let’s return to the example of two oil companies: Federal Gas and National Gas. The gas they produce is identical, but now they decide their output levels sequentially. We will assume that Federal Gas sets its output first, and then after observing Federal’s choice, National Gas decides on the quantity of gas they are going to produce for the week. We will again call Federal’s output choice [latex]q_F[/latex] and National’s output choice [latex]q_N[/latex], where [latex]q[/latex] represents liters of gasoline. The weekly demand for wholesale gas is still [latex]P = A—BQ[/latex], where [latex]Q[/latex] is the total quantity of gas supplied by the two firms, or

[latex]Q=q_F+q_N[/latex].

We have now turned the previous Cournot game into a sequential game, and the [latex]SPNE[/latex] solution to a sequential game is found through backward induction. So we have to start at the second move of the game: National’s output choice. When National makes this decision, Federal’s output choices are already made and known to National, so it is taken as given. Therefore, we can express Federal’s profit function as

[latex]\Pi _N=q_N(A-B(q_N+q_F)-c)[/latex].

This is the same as in the Cournot example, and for National, the best response function is also the same. This is because in the Cournot case, both firms took the other’s output as given.

[latex]q^*_N=\frac{A-c}{2B}-\frac{1}{2}q_F[/latex]

When it comes to Federal’s decision, we diverge from the Cournot model because instead of taking [latex]q_N[/latex] as a given, Federal knows exactly how National will respond because they know the best response function. Federal’s profit function,

[latex]\Pi _F=q_F(A-Bq_F-Bq_N-c)[/latex],

can be re-written, replacing [latex]q_N[/latex] with the best response function:

[latex]\Pi _F=q_F(A-Bq_F-B(\frac{A-C}{2B}-\frac{1}{2})-c)[/latex]

If the profit function is [latex]\Pi_F[/latex] [latex]=[/latex] [latex]q_F([/latex] [latex]\frac{A-C}{2}-[/latex] [latex]B[/latex] [latex]\frac{1}{2}[/latex] [latex]q_F)[/latex] , then we can find the optimal output level by solving for the stationary point, or solving

[latex]\frac{\partial \Pi _F}{\partial q_F}[/latex] [latex]=[/latex] [latex]_0[/latex]

If [latex]\Pi_F[/latex] [latex]=[/latex] [latex]q_F([/latex] [latex]\frac{A-c}{2}-[/latex] [latex]B[/latex] [latex]\frac{1}{2}[/latex] [latex]q_F)[/latex] , then we can expand to find

[latex]\Pi_F[/latex] [latex]=[/latex] [latex]q_F([/latex] [latex]\frac{A-c}{2}[/latex] [latex])q_F[/latex] [latex]-B[/latex] [latex]\frac{1}{2}[/latex] [latex]q_{F}^{2}[/latex]

Taking the partial derivative of this expression with respect to [latex]q_F[/latex], we get

[latex]\frac{\partial \Pi _F}{\partial q_F}[/latex] [latex]=([/latex] [latex]\frac{A-c}{2}[/latex] [latex])[/latex][latex]-[/latex] [latex]Bq_F=[/latex] [latex]_0[/latex]

[latex]q_F=[/latex] [latex]\frac{A-c}{2B}[/latex]

This is Federal Gas’s profit maximizing output level, given that they choose first and can anticipate National’s response.

We can see that Federal’s profits are determined only by their own output once we explicitly consider National’s response. Simplifying yields

[latex]\Pi _F=q_F(\frac{A-c}{2}-B\frac{1}{2}q_F)[/latex].

We know that the second mover’s best response is the same as in section 18.1 , and the solution to the profit optimization problem above yields the following best response function for Federal Gas:

[latex]q^*_F=\frac{A-c}{2B}[/latex],

substituting this into National’s best response function and solving the following:

[latex]q^*_N=\frac{A-c}{2B}-\frac{1}{2}\left [ \frac{A-c}{2B} \right ][/latex]

[latex]q^*_N=\frac{A-c}{2B}-\left [\frac{A-c}{4B} \right][/latex]

[latex]q^*_N=\frac{A-c}{4B}[/latex]

The subgame perfect Nash equilibrium is

([latex]q^*_F[/latex], [latex]q^*_F[/latex])

A few things are worth noting when comparing this outcome to the Nash equilibrium outcome of the Cournot game in section 18.1 . First, the individual output level for Federal, the first mover in the Stackelberg game, the Stackelberg leader , is higher than it is in the Cournot game. Second, the individual output level for National, the second mover in the Stackelberg game, the Stackelberg follower , is lower than it is in the Cournot game. Third, the total output is larger in the Stackelberg outcome than in the Cournot outcome. This means the price is lower because the demand curve is downward sloping. Since the Cournot outcome is one of the options for the Stackelberg leader—if it chooses the same output as in the Cournot case, the follower will as well—it must be true that profits are higher for the Stackelberg leader. And since both the quantity produced and the price received are lower for the Stackelberg follower compared to the Cournot outcome, the profits must be lower as well.

So from this we see the major differences in the Stackelberg model compared to the Cournot model. There is a considerable first-mover advantage . By being able to set its quantity first, Federal Gas is able to gain a larger share of the market for itself, and even though it leads to a lower price, it makes up for that lower price with the increase in quantity to achieve higher profits. The opposite is true for the second mover: by being forced to choose after the leader has set its output, the follower is forced to accept a lower price and lower output. From the consumer’s perspective, the Stackelberg outcome is preferable because overall, there is more quantity at a lower price.

The end of the twentieth century saw a number of mergers of massive oil companies. In 1999, BP Amoco acquired ARCO, followed soon thereafter by Exxon’s acquisition of Mobil. Then, in 2001, Chevron acquired Texaco for $38.7 billion. The newly combined company became the world’s fourth-largest producer of oil and natural gas. Whenever any such mergers and acquisitions are proposed, the US government has to approve the deal, and sometimes this approval comes with conditions designed to protect US consumers from undue harm that the consolidation might cause due to market concentration. In this case, the Federal Trade Commission (FTC) was the agency that provided oversight, and in the end, they approved the merger with the following condition: they had to sell their stake in two massive oil refineries. However, they were largely allowed to retain their retail gas operations, even though both companies had significant market presence and their merger would cause a drop in the competitiveness of the retail gas market, particularly in some areas where both companies had a significant market share.

On their face, these decisions seem to make little sense. How is it that the US government is worried about the impact of the merger on refining and the wholesale gas market but not on the retail gas market? The answer lies in the way these two markets fit into the economic models of oligopoly. Refining and wholesale gas operations are more akin to the Cournot model, where a few firms produce a homogenous product and compete on quantity and the sum total of all gas refined sets the wholesale market price. The insight of the Cournot model is that every merger produces fewer firms, and this constrains supply and increases price. Remember that this is a function not of capacity—that has not changed—but of the strategic environment, which makes it easier for all firms to constrict supply, which, in turn, raises prices and profits. The lower supply and higher prices do material harm to consumers, however, and it is for this reason that the FTC stepped in and demanded that the merged company sell off its interest in two big refining operations.

On the other hand, retail gas is more akin to the Bertrand model, where a bunch of retailers are selling a homogenous good but are competing mostly on price. A cursory examination of the retail gas industry confirms this: prices are posted prominently, and consumers show very strong responses to lower prices. The Bertrand model shows us that it takes very little competition to result in highly competitive pricing, so a merger that might reduce the number of competing gas station brands by one is unlikely to have much of a material effect on prices and therefore will be unlikely to harm consumers.

Viewed through the lens of the models of oligopoly studied in this chapter, the FTC’s decision to demand a divestment in oil refining and wholesale gas operations but mostly allow the retail side to consolidate makes sense. It is no surprise that these are the very same models the government uses to analyze such situations and devise a response.

• Do you think it is correct that wholesale gas looks more like the Cournot model and retail gas looks more like the Bertrand model?
• Do you think the government did the right thing in the case of the Chevron-Texaco merger?

Review: Topics and Related Learning Outcomes

Learn: key topics.

Oligopoly markets are markets in which only a few firms compete, where firms produce homogeneous or differentiated products, and where barriers to entry exist that may be natural or constructed.

The Cournot model considers firms that make an identical product and make output decisions simultaneously.

The Bertrand model considers firms that make an identical product but compete on price and make their pricing decisions simultaneously.

The Stackelberg model considers quantity-setting firms with an identical product that make output decisions simultaneously.

Tables and Graphs

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• 18.1.1 © Patrick M. Emerson is licensed under a CC BY-NC-SA (Attribution NonCommercial ShareAlike) license

Intermediate Microeconomics Copyright © 2019 by Patrick M. Emerson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

What Makes a Market an Oligopoly?

Do you know of any industries in which just three or four companies supply most of a specific product?

Some examples:

• From the 1950s to the 1980s, three major broadcast television networks dominated the U.S. airwaves.
• After a series of mergers between 2005 and 2015, four major airlines controlled much of the U.S. market, as a November 2018 Page One Economics essay described.
• Even more recently, shortages and price increases brought attention to the U.S. baby formula market and global insulin market, which also had just a few suppliers.

Those markets could be considered “oligopolies”—markets in which only a few sellers or suppliers dominate.

Suppliers and sellers in an oligopoly can command higher prices than companies in a competitive market, and if one company in an oligopoly stops producing, it has a bigger effect on supply than it would in a competitive market.

Read on for more comparisons of oligopolies to other types of markets and to learn how to tell whether a particular market could be considered an oligopoly.

What Is an Oligopoly?

As the table shows, in addition to having only a few sellers or suppliers dominating the market, an oligopoly has barriers to entering the market, and “there are few close substitutes for the product.”

In other words, certain conditions make it difficult for potential competitors to start selling or supplying a particular product or service within that industry, and there aren’t many alternatives that could be used instead. Monopolies—markets in which one firm dominates—also have those barriers.

“Barriers to entry” could include factors such as costly equipment needed to produce a product, patents restricting who can use an invention, and government regulations that are difficult to meet, as a Corporate Finance Institute article outlined.

What Are Examples of Barriers to Entry?

In the case of the U.S. infant formula market, barriers to entry have included tariffs and Food and Drug Administration standards . (Some of the infant formula market barriers were waived to help ease the shortage last year.)

Until the expansion of the cable TV market in the 1980s, the limited availability of broadcast frequencies helped to restrict the number of television networks, with the Federal Communications Commission in charge of allocating portions of the broadcast spectrum to stations.

Barriers to entry in the airline industry include high startup costs, such as for purchasing airplanes, competition for airport gates and large economies of scale, the Page One Economics essay said.

Government can put up barriers, as a St. Louis Fed Econ Lowdown lesson on market structures (PDF)  outlined in discussing monopolistic markets. Such markets are rare, according to the lesson.

“Most commonly, [monopolistic markets] occur because government has granted a single firm the opportunity to supply a good or service. This is known as a ‘natural monopoly, ’ ” according to the lesson, which gives the examples of electric and natural gas providers. Because of the expensive infrastructure needed for those services, such as wires and pipes entering people’s homes, it’s cheaper for one firm to provide the service than to build infrastructure needed for true competition.

“In exchange, government often regulates prices in these markets to ensure that these firms do not take advantage of their market power,” the lesson says.

How Can You Tell If a Market Is an Oligopoly?

A “concentration ratio” is one tool that can indicate whether a market is an oligopoly.

A concentration ratio is the combined market share of the largest firms in an industry, according to Oxford Reference . That is, it’s the percentage of the industry’s products or services provided by those firms.

The number of firms used for the ratio can vary. A “four-firm” ratio is often used as a benchmark to show market structure, according to Oxford. But the ratios also can be calculated using the market share from the eight, five or three largest firms in the market, according to a September 2020 Investopedia article.

“A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60% of total market sales,” the article says. “If the concentration ratio of one company is equal to 100%, this indicates that the industry is a monopoly.”

In 2015, the four major airlines controlled 80% of the U.S. market, the Page One Economics essay said. Three manufacturers have more than 90% of the global insulin market , according to a July 2022 press release from Grand View Research, a global market research and consulting company. That would make those markets oligopolies, according to the Investopedia rule of thumb.

What Are Two Types of Oligopolistic Markets?

Oligopolistic markets differ, and different types of markets have different effects on prices, as the Econ Lowdown lesson illustrates.

One such market is a collusive oligopoly , which has a few sellers who work together “to divide the market, set prices, or limit production,” the lesson says. Companies might, for example, agree to limit production to drive up prices. Such collusion is often illegal.

In a competitive oligopoly , the few sellers compete, which keeps the prices lower than they would be in a collusive oligopoly.

In general, more competition results in lower prices for consumers. So, a perfect competition market structure, in which lots of companies provide the same product, would result in lower prices, while a monopoly could mean the highest prices for consumers. Depending on whether they are collusive or competitive, oligopolies can be more like monopolies or more like perfect competition, respectively, as a Khan Academy video explains.

Can Oligopolies Change?

Market structures aren’t necessarily fixed, as the Page One Economics essay illustrated with the example of U.S. airlines.

Airline ticket prices declined as low-cost carriers started expanding their routes in 2016, the essay said. A chart from online database FRED shows the downward trend in airfares before the COVID-19 pandemic.

“The proliferation of low-cost flights in recent years has pushed the airline industry, which was arguably an oligopoly, toward monopolistic competition,” the essay said.

Heather Hennerich is a senior editor with the St. Louis Fed External Engagement and Corporate Communications Division.

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• The Emergence of Oligopoly: Sugar Refining as a Case Study

In this Book

• Alfred S. Eichner
• Published by: Johns Hopkins University Press
• Funder: Mellon/NEH / Hopkins Open Publishing: Encore Editions

Table of Contents

• New Copyright
• Half Title Page
• 1 • The Larger Framework
• 2 • The Emergence of a Competitive Industry
• 3 • Competition and Instability
• 4 • The Trust is Born
• 5 • Why Consolidation
• 6 • A Change in Legal Form
• pp. 120-151
• 7 • Culmination and Condonation
• pp. 152-187
• 8 • The Problem of Entry
• pp. 188-228
• 9 • The Exercise of Control
• pp. 229-263
• 10 • The Old Order Passeth
• pp. 264-290
• 11 • The Acceptance of Oligopoly
• pp. 291-331
• 12 • Historical Perspectives
• pp. 332-335
• Appendixes and Bibliography
• A • Sugar Refineries Located in New York City, 1868–87
• B • Sugar Refineries Located in Philadelphia, 1869–87
• C • Sugar Refineries Located in Boston, 1868–87
• D • Average Prices of Raw and Refined Sugar for Selected Years, and the Margin between Them
• E • Domestic Sugar-Market Shares
• F • Havemeyer and American Sugar Refining Company Holdings in Sugar Beet Companies, 1907
• pp. 345-349
• Bibliography
• pp. 351-364
• pp. 365-388

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Digital Monopolies and Oligopolies

• First Online: 13 August 2021

Cite this chapter

• Harald Øverby   ORCID: orcid.org/0000-0002-4911-4311 2 &
• Jan Arild Audestad 2  

Part of the book series: Classroom Companion: Business ((CCB))

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There are five dominating market forms in the digital economy: de facto monopoly, oligopoly, market with monopolistic competition, monopsony, and oligopsony. A multisided platform may be present in several markets with different structures, for example, being a monopoly in one segment, an oligopsony in another segment, and an oligopoly in a third segment. One particular characteristic of de facto monopolies in the digital economy is that they offer their products free of charge. This makes it almost impossible for new entrants to compete with them unless they can offer richer and better services, of course, also free of charge. These enterprises are multisided platforms acquiring revenues from other market sectors, often being oligopolies in these sectors. One particular challenge for oligopolies is the prisoner’s dilemma. Prisoner’s dilemma implies that competitors may be forced into a situation where the revenues of all of them are small. This may then squeeze the weakest of them out of the market.

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Baumol, W. J., Panzar, J. C., & Willig, R. D. (1982). Contestable markets and the theory of industry structure . Harcourt Brace Jovanovich.

Google Scholar  

Blair, I. (2019). Mobile app download and usage statistics. BuildFire.

Nelson, R. Global app revenue topped $18 billion last quarter, up 23% year-over-year. Sensor Tower . October 10, 2018.

Zuckerberg makes it official: Facebook hits 500 million members. TechCrunch . July 4, 2010.

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Øverby, H., Audestad, J.A. (2021). Digital Monopolies and Oligopolies. In: Introduction to Digital Economics. Classroom Companion: Business. Springer, Cham. https://doi.org/10.1007/978-3-030-78237-5_13

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1.5 Monopolistic Competition, Oligopoly, and Monopoly

Learning objective.

• Describe monopolistic competition, oligopoly, and monopoly.

Economists have identified four types of competition— perfect competition , monopolistic competition , oligopoly , and monopoly . Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.

Monopolistic Competition

In monopolistic competition , we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).

How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.

Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly , however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.

There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal . Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years (United States Patent and Trademark Office, 2006). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology (Bellis, 2006). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.

Key Takeaways

• There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
• Under monopolistic competition , many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
• In an oligopoly , a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
• In a monopoly , there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
• Most monopolies fall into one of two categories: natural and legal .
• Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
• A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)

Bellis, M., “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012).

United States Patent and Trademark Office, General Information Concerning Patents , April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012).

Exploring Business Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Oligopoly (Online Lesson)

Last updated 20 Jul 2020

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In this online lesson, we cover the oligopoly market structure.

WHAT YOU'LL STUDY IN THIS ONLINE LESSON

• the characteristics of an oligopoly market structure
• the construction of a kinked demand curve
• price and non-price competition
• the existence of collusion and cartels
• how game theory impacts on the behaviours of oligopolistic firms

Additional teacher guidance is available at the end of this online lesson.

HOW TO USE THIS ONLINE LESSON

Follow along in order of the activities shown below. Some are interactive game-based activities, designed to test your understanding and application of oligopoly. Others are based on short videos, including activities for you to think about and try at home, as well as some extra worksheet-based activities.

If you would like to download a simple PDF worksheet to accompany the video activities, you can find it here . You can print it off and annotate it for your own notes, or make your own notes on a separate piece of paper to add to your school/college file.

ACTIVITY 1: VIDEO - KEY CONCEPTS

In this video, we look at the key concepts that are required when considering the oligopoly market structure including its characteristics and and some real world examples.

ACTIVITY 2: VIDEO - THE KINKED DEMAND CURVE

Kinked demand curve theory is used to explain some of the behaviours of firms that exist in an oligopolistic market. This video discusses how the kinked demand curve is constructed and how it illustrates non-price competition.

ACTIVITY 3: VIDEO - PRICE AND NON-PRICE COMPETITION

This video explained how firms in an oligopolistic market compete with one another and provides some real world examples of non-price competition in action!

ACTIVITY 4: VIDEO - CARTELS AND COLLUSION

The existence of price rigidity in an oligopolistic market can encourage firms to collude. This video examines the causes of business collusion, the creation of cartels and how this can be represented diagrammatically.

ACTIVITY 5: VIDEO - GAME THEORY

This video examines how economists use game theory to model the behaviour of businesses in concentrated markets.

ACTIVITY 6: GAME - TAKEOVERS

Challenge yourself with this short interactive quiz where you have 60 seconds to match the 8 real-world examples of takeovers in concentrated markets.

ACTIVITY 7: GAME - FIRMS THAT EXIST IN OLIGOPOLY MARKETS

Have a go at this 'concentration' activity where you need to match 6 pairs of firms that exist in the same oligpolistic market.

EXTENSION TASKS

• Read this article from the Economist on cartels on Mexico. Identify the reforms put in place by the Mexican government and explain how these might reduce collusive behaviour.
• Read this article from the Economist on Organisation of Petroleum Exporting Countries (OPEC) . Use a cost and revenue diagram to analyse the impact of OPEC’s production cut on the cartel’s profits.

ADDITIONAL TEACHER GUIDANCE

This lesson comprises:

• around 30 minutes of guided video content, spread across 4 videos
• around 15-20 minutes of student thinking and activity time throughout the videos
• 2 interactive games, designed to build awareness of real-world economics and application
• an additional task reviewing the global examples of cartels and collusion.

Follow up this lesson by trying the online lesson on Contestable Markets .

• Tacit Collusion

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Monopoly vs. Oligopoly: What's the Difference?

Monopoly vs. Oligopoly: An Overview

A monopoly and an oligopoly are market structures that exist when there is imperfect competition. A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods. In both cases, significant barriers to entry prevent other enterprises from competing.

A market's geographical size can determine which structure exists. One company might control an industry in a particular area with no other alternatives, though a few similar companies operate elsewhere in the country. In this case, a company may be a monopoly in one region, but operate in an oligopoly market in a larger geographical area.

Key Takeaways

• A monopoly occurs when a single company that produces a product or service controls the market with no close substitute.
• In an oligopoly, two or more companies control the market, none of which can keep the others from having significant influence. 
• Anti-trust laws prevent companies from engaging in unreasonable restraint of trade and transacting mergers that lessen competition.  

A monopoly exists in areas where one company is the only or dominant force to sell a product or service in an industry . This gives the company enough power to keep competitors away from the marketplace. This could be due to high barriers to entry such as technology, steep capital requirements, government regulation, patents or high distribution costs.

Once a monopoly is established, lack of competition can lead the seller to charge high prices. Monopolies are price makers. This means they determine the cost at which their products are sold. These prices can be changed at any time. A monopoly also reduces available choices for buyers. The monopoly becomes a pure monopoly when there is absolutely no other substitute available.

Monopolies are allowed to exist when they benefit the consumer. In some cases, governments may step in and create the monopoly to provide specific services such as a railway, public transport or postal services. For example, the United States Postal Service enjoys a monopoly on first class mail and advertising mail, along with monopoly access to mailboxes.  

The United States Postal Service enjoys a monopoly on letter carrying and access to mailboxes that is protected by the Constitution.  

In an oligopoly, a group of companies (usually two or more) controls the market. However, no single company can keep the others from wielding significant influence over the industry, and they each may sell products that are slightly different.

Prices in this market are moderate because of the presence of competition. When one company sets a price, others will respond in fashion to remain competitive. For example, if one company cuts prices, other players typically follow suit. Prices are usually higher in an oligopoly than they would be in perfect competition .

Because there is no dominant force in the industry, companies may be tempted to collude with one another rather than compete, which keeps non-established players from entering the market. This cooperation makes them operate as though they were a single company.

In 2012, the U.S. Department of Justice alleged that Apple ( AAPL ) and five book publishers had engaged in collusion and price fixing for e-books. The department alleged that Apple and the publishers conspired to raise the price for e-book downloads from $9.99 to $14.99.   A U.S. District Court sided with the government, a decision which was upheld on appeal.  

In a free market, price fixing—even without judicial intervention—is unsustainable. If one company undermines its competition, others are forced to quickly follow. Companies that lower prices to the point where they are not profitable are unable to remain in business for long. Because of this, members of oligopolies tend to compete in terms of image and quality rather than price.

Legalities of Monopolies vs. Oligopolies

Oligopolies and monopolies can operate unencumbered in the United States unless they violate anti-trust laws. These laws cover unreasonable restraint of trade; plainly harmful acts such as price fixing, dividing markets and bid rigging; and mergers and acquisitions (M&A) that substantially lessen competition.  

Without competition, companies have the power to fix prices and create product scarcity, which can lead to inferior products and services and higher costs for buyers. Anti-trust laws are in place to ensure a level playing field.

In 2017, the U.S. Department of Justice filed a civil antitrust suit to block AT&T's merger with Time Warner, arguing the acquisition would substantially lessen competition and lead to higher prices for television programming.   However, a U.S. District Court judge disagreed with the government's argument and approved the merger, a decision that was upheld on appeal.  

The government has several tools to fight monopolistic behavior. This includes the Sherman Antitrust Act , which prohibits unreasonable restraint of trade, and the Clayton Antitrust Act , which prohibits mergers that lessen competition and requires large companies that plan to merge to seek approval in advance.   Anti-trust laws do not sanction companies that achieve monopoly status via offering a better product or service, or though uncontrollable developments such as a key competitor leaving the market.

Examples of Monopolies and Oligopolies

A company with a new or innovative product or service enjoys a monopoly until competitors emerge. Sometimes these new products are protected by law. For example, pharmaceutical companies in the U.S. are granted 20 years of exclusivity on new drugs. This is necessary due to the time and capital required to develop and bring new drugs to market. Without this protected status, firms would not be able to realize a return on their investment , and potentially beneficial research would be stifled.

Gas and electric utilities are also granted monopolies. However, these utilities are heavily regulated by state public utility commissions. Rates are often controlled, along with any rate increases the company may pass onto consumers.

Oligopolies exist throughout the business world . A handful of companies control the market for mass media and entertainment. Some of the big names include The Walt Disney Company ( DIS ), ViacomCBS ( VIAC ) and Comcast ( CMCSA ). In the music business, Universal Music Group and Warner Music Group have a tight grip on the market.

Federal Trade Commission. " The Antitrust Laws ."

U.S. Government Accountability Office. " U.S. Postal Service: Key Considerations for Potential Changes to USPS's Monopolies ," Pages 3, 4.

U.S. Department of Justice. " Justice Department Reaches Settlement with Three of the Largest Book Publishers and Continues to Litigate Against Apple Inc. and Two Other Publishers to Restore Price Competition and Reduce E-book Prices ."

U.S. Court of Appeals for the Second Circuit. " United States v. Apple Inc. ," Pages 4-19.

U.S. Department of Justice. " Justice Department Challenges AT&T/DirecTV’s Acquisition of Time Warner ."

United States Court of Appeals for the District of Columbia Circuit. " United States of America v. AT&T, Inc. Et Al ," Pages 4-34.

U.S. Food and Drug Administration. " Frequently Asked Questions on Patents and Exclusivity ."

• Antitrust Laws: What They Are, How They Work, Major Examples 1 of 24
• Understanding Antitrust Laws 2 of 24
• Federal Trade Commission (FTC): What It Is and What It Does 3 of 24
• Clayton Antitrust Act of 1914: History, Amendments, Significance 4 of 24
• Sherman Antitrust Act: Definition, History, and What It Does 5 of 24
• Robinson-Patman Act Definition and Criticisms 6 of 24
• How and Why Companies Become Monopolies 7 of 24
• Discriminating Monopoly: Definition, How It Works, and Example 8 of 24
• What Is Price Discrimination, and How Does It Work? 9 of 24
• Predatory Pricing: Definition, Example, and Why It's Used 10 of 24
• Bid Rigging: Examples and FAQs About the Illegal Practice 11 of 24
• Price Maker: Overview, Examples, Laws Governing and FAQ 12 of 24
• What Is a Cartel? Definition, Examples, and Legality 13 of 24
• Monopolistic Markets: Characteristics, History, and Effects 14 of 24
• Monopolistic Competition: Definition, How it Works, Pros and Cons 15 of 24
• What Are the Characteristics of a Monopolistic Market? 16 of 24
• Monopolistic Market vs. Perfect Competition: What's the Difference? 17 of 24
• What are Some Examples of Monopolistic Markets? 18 of 24
• A History of U.S. Monopolies 19 of 24
• What Are the Most Famous Monopolies? 20 of 24
• Monopoly vs. Oligopoly: What's the Difference? 21 of 24
• Oligopoly: Meaning and Characteristics in a Market 22 of 24
• Duopoly: Definition in Economics, Types, and Examples 23 of 24
• Oligopolies: Some Current Examples 24 of 24

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Oligopoly Notes & Questions (A-Level, IB)

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Oligopoly Definition: An Oligopoly is a market structure where only a few sellers dominate the market.

Oligopoly Examples & Explanation: Because there are only a few firms (players) in an Oligopoly, they tend to be highly interdependent of one another – meaning they will take in account each others’ actions when trying to compete in the market. Another characteristic is these markets also exhibit high barriers to entry, such that new firms cannot easily enter into the market. This characteristic is shared with Monopolies (one firm dominating) and Duopolies (two-firms dominating), explaining how they can dominate the market with large amounts of market share. If we consider the oil & gas industry, they tend to be an Oligopoly in most countries (think Shell, BP, Exxon) due to the huge capital investment required for oil exploration/mining, making it difficult for new producers to enter into the market. When a large oil/gas producer sells their oil at a lower price to increase their sales volume, other producers are likely to lower their prices as well to protect their share of the market. As a result, Oligopolies tend to keep market prices stable and focus on non-price competition, so that firms can avoid a price war. However, the negative oil prices from the coronavirus pandemic is also caused by other factors, including a lack of storage capacity for oil producers forcing them to sell, and a global lack of demand for oil during the crisis. In general, oil producers in OPEC agree on an amount of output to maintain a relatively high price for oil, meaning higher profits for the industry.

Oligopoly Economics Notes with Diagrams

Oligopoly video explanation – econplusdal.

The left video explains oligopoly and the kinked-demand curve, the right looks at competition and cartels in the oligopoly market structure.

Oligopoly Multiple Choice Questions (A-Level)

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