What is an 'Oligopoly'

Oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly is similar to a monopoly, except that rather than one firm, two or more firms dominate the market. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly impact and influence the others.

BREAKING DOWN 'Oligopoly'

An example of an oligopoly is the wireless service industry in Canada, in which three companies – Rogers Communications Inc (RCI), BCE Inc (BCE) subsidiary Bell and Telus Corp (TU) – control approximately 90% of the market. Canadians are conscious of this oligopolistic market structure and often lump the three together as "Robelus," as though they were indistinguishable. In fact, they are often indistinguishable in price: in early 2014 all three companies raised the price for smartphone plans to $80 in most markets, more or less in tandem.

This example shows that participants in oligopolies are often able to set prices, rather than take them. For this reason oligopolies are considered to be able increase profit margins above what a truly free market would allow.

Most jurisdictions have laws against price fixing and collusion. An oligopoly in which participants explicitly engage in price fixing is a cartelOPEC is one example. Tacit collusion, on the other hand, is perhaps more common though more difficult to detect. A stable oligopoly will often have a price leader; when the leader raises prices, the others will follow.

The alternative is for one or more firms to take advantage of the price rise by cutting prices and siphoning business away from the company with the highest price. If that happens, firms may align in a number of different ways: the majority may keep prices low in an attempt to squeeze the firm with the highest price out of the market; the majority may raise prices, isolating the "cheating" firm and putting it under financial strain; or they may each attempt to undercut the rest, setting off a price war that could damage them all. The late 19th-century railroad cartel in the U.S. was characterized by blatant collusion and price fixing, interspersed with vicious price wars.

Game theorists have developed models for these scenarios, which form a sort of prisoner's dilemma. In general, a situation of (tacit) collusion on prices is considered to be the Nash equilibrium state for oligopolies. Rather than using price, firms in oligopolies tend to prefer to use product differentiationbranding and marketing to compete, with the goal being to increase market share.

The reason new entrants seldom come in to disrupt the market is that oligopolistic industries tend to have high barriers to entry. Wireless carriers, for example, must either build and maintain towers, requiring massive capital expenditures, or lease the incumbents' infrastructure at vampiric rates. Carriers also tend to have strong, instantly recognizable brands. Even if these brands carry certain negative associations (ie, "cartel"), they provide a distinct advantage over unknown new entrants. Other industries that have commonly seen oligopolies also have high barriers to entry: oil and gas drillers, airlines, grocers and movie studios are a few examples.

A duopoly​ is an oligopoly composed of two participants. 

RELATED TERMS
  1. Market Power

    A company's ability to manipulate price by influencing an item's ...
  2. Duopoly

    A situation in which two companies own all or nearly all of the ...
  3. Oligopsony

    Similar to an oligopoly (few sellers), this is a market in which ...
  4. Collusion

    A non-competitive agreement between rivals that attempts to disrupt ...
  5. Concentration Ratio

    In economics, a ratio that indicates the relative size of firms ...
  6. Contestable Market Theory

    An economic concept that refers to a market in which there are ...
Related Articles
  1. Insights

    The Prevalence of Oligopolies

    An oligopoly occurs when a select few companies have the majority of market share.
  2. Investing

    Understanding Imperfect Competition

    Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition.
  3. Small Business

    What is a Firm?

    A firm is a business or organization that sells goods or services on a for-profit basis.
  4. Insights

    What is a Cartel?

    A cartel is a group of companies or countries that act together to control the price of a single good that they produce.
  5. Personal Finance

    Financial Career Shift: Get In The Driver's Seat

    Before you agree to work for another investment firm, be sure you know what you're getting into.
  6. Insurance

    A Primer On Private Equity

    Private equity investing is becoming more accessible for individual investors; find out how you can get involved.
  7. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  8. Insights

    How Interest Rates Affect Private Equity

    With an impending increase in US interest rates and lower - even negative rates - elsewhere in Europe and Japan, we assess the impact on private equity.
  9. Managing Wealth

    How To Profit During High Inflation

    Some companies are better than others at pivoting their strategies to overcome inflation or other cost-increasing concerns. The best companies can push cost increases out to the market quickly ...
RELATED FAQS
  1. What are the major differences between a monopoly and an oligopoly?

    The major differences between a monopoly and an oligopoly include the number of firms in the market, type of barriers to ... Read Answer >>
  2. What are the most famous cases of oligopolies?

    Learn about famous examples of oligopolies currently in place in the United States, Canada and worldwide. Explore imperfect ... Read Answer >>
  3. What are some current examples of oligopolies?

    Learn what oligopolies are and examples of markets where they are prevalent. Read Answer >>
  4. Why are oligopolies legal while monopolies are not?

    Learn about oligopolies and monopolies. Explore situations where anti-competitive practices have led to intervention by the ... Read Answer >>
  5. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  6. Is the airline industry in an oligopoly state?

    Learn about oligopolies and the current state of the U.S. airline industry. Explore how the Airline Deregulation Act changed ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center