Characteristics of an Oligopolistic Market Structure
An oligopolistic market structure is a structure, in which only a few large companies are dominant. These firms may be the only ones in the market or at times there may also be other small businesses. The first and foremost common characteristic of this market structure lies in the number of firms in the market. There are not so many companies, but they have a large capacity. Being few in the market makes it possible for one company’s decisions to affect the other firms. The second characteristic of this market is that the companies exercise mutual interdependence. As just a few companies are present when a firm makes a choice it is bound to affect the rest of the companies in the marketplace. For this reason, companies are dependent on each other. Before making its decisions, a company must inquire about the reaction of its neighbors. On their part, the neighboring firms have to keep strategizing on how to beat their competitors in the market. Strategic behavior is the third characteristic of the oligopolistic market structure. Firms have to keep on strategizing on how to outshine the competition as the companies are interdependent. The strategic behaviors that businesses exercise may include decisions on increasing the prices for their products or embarking on creative marketing like product differentiation.
The fourth distinguishing factor of this market structure is its various barriers to entry created by the few large companies to prevent small firms from entering the market. Oligopolies always consist of a few companies dominating the entire market. These companies enact barriers such as owning scarce resources or having the superior knowledge of the market. Small businesses that are new in the market and have no possession of these limited resources would be frustrated upon entering such a market as they would end up experiencing losses. Formation of cartels and collusions is the fifth characteristic of the oligopolistic market structure. Most of the time, firms in this structure join forces to act as a monopoly. This way the companies can control the market in ventures such as setting the prices of products and services. An example of collusion would be an organization formed to control oil issues especially the setting of global oil prices. The sixth characteristic of the market structure is in the nature of their products. The companies in an oligopolistic market structure may be selling the same products such as aluminum sheets. The firms may also be selling differentiated products like various models of automobiles. For the companies that sell differentiated products, advertising is essential. The firms have to exercise strategic behavior and be creative to outshine their rivals. The seventh and most common characteristic of oligopolies is that they are price setters. The firms in this market structure are known to set prices rather than to use prices that are already set. Being few, large and dominant in the market structure makes it possible for them to set prices that are to be accepted and used by everyone. An example of a price setter is OPEC that is famous for setting global fuel prices.
Concentrated Market
A concentrated market is a market consisting of a few firms. These companies control a large share of the market. A number of businesses existing in a concentrated market dominate it and makes it impossible for other companies to enter the market. The firms in a concentrated market are known to practice mutual interdependence and strategic behavior.
An Oligopolistic Industry
An industry is considered an oligopol