Oligopoly: Definition, Characteristics and examples

We can identify four major types of market structures. They are perfect competition, monopolistic competition, oligopoly, and monopoly. To see them, kindly click here.

In this study, we will discuss about the oligopoly definition, oligopoly characteristics and oligopoly examples.

To read more about the the perfect competition, kindly click here

To read more about the the monopolistic competition , kindly click here

Further, to read more about the the monopoly, kindly click here

What is Oligopoly ? (Oligopoly Definition)

The market structure where are there only few firms in the market and these producers have significant power to set the market price is called the oligopoly market structure.

Airlines, Steel manufacturing, Crude oil supplying, Railroads, Tire manufacturing, Grocery store chains, and Wireless carriers are oligopoly examples.

Oligopoly Characteristics

1. In an oligopolistic market, a few companies are operating. Because there is a higher level of barriers to entry and exit from the market . There are two major types of factors that can block a firm from entering industry. They are Natural (Structural) Barriers to Entry and Artificial (Strategic) Barriers to Entry.

2. Since there are a few companies are operating, each company has a significant market share. So each company has a considerable monopoly power to control the market price and output. 

3. Products of the oligopoly firms are either homogeneous or differentiated. One of the characteristics of an oligopoly is that its members are focused on improving product quality or providing benefits to distinguish their brand.

4. Collusive oligopoly and non-collusive oligopoly are two different types of oligopolies. A collusive oligopoly is a market scenario in which businesses collaborate to determine pricing or production, or both pricing and production. But in non-collusive oligopoly businesses are compete rather than collaborate.

5. So, each company interdepends on the actions of the other companies. This also can be identified as an imperfectly competitive market.

6. Companies in the oligopolistic market compete based on three ways. They are the objectives of the firms, degree of contestability, and government regulation.
In the oligopoly market firms depend on non-price methods. Such as advertising, after-sales services, warranties, etc. These non-price methods help to increase demand, brand recognition and gain competitive advantages.

7. Oligopolistic firms earn an economic profit (supernormal profit) in the both short run and long run. Because as I mentioned earlier, there are a few companies in the market and each company has a considerable monopoly power to control the market price and output. I will graphically present the economic profit is earned by a collusive oligopolistic company in both the short run and long run as follows.

8. When marginal revenue (MR) equals marginal cost (MC), an organization can maximize the profit, minimize its loss or earn a normal profit.

Example of oligopoly graph

According to the above graph 1 at point E, marginal cost (MC) equals marginal revenue (MR). The amount of quantity that relates to this point (E) is Qf units. So, the firm produces Qf units. At the Qf units of production, the average cost per unit (AC) is “B” and the average revenue per unit (AR) is “A”. We can see that here AR is greater than the AC. So, we can calculate the total profit of the firm by multiplying the number of Qf units from the difference between AR and AC. In other words, ABCD rectangular area presents the amount of supernormal profit of the firm.

Oligopoly Examples

I will present some of the industries for oligopoly examples as follows

1. Airline industry

 2. Steel manufacturing industry

3. Crude oil supplying industry

4. Railroads,

5. Tire manufacturing industry

6. Grocery store chains

7. Wireless carriers.

How Oligopoly examples fit to oligopoly market characteristics?

As an example for the oligopolistic company, I have selected the Malaysia Airlines Berhad which operates in the Malaysian airline industry.

There are higher levels of barriers to entering and exiting the Malaysian airline industry. There is a higher startup cost to enter the airline industry. For example I will say, new Boeing 737 airplane can cost $80 to $116 million The Malaysian airline industry is regulated by many strict regulations. As examples I will say, Civil Aviation Act 1969, Aviation Offences Act 1984, Carriage by Air Act 1974, Malaysian Aviation Commission Act 2015, and so on (Global Legal Group, 2022). As a company that operates in the Malaysian airline industry, “Malaysia Airlines Berhad” has to face such kinds of barriers.

Malaysian airline industry comprises six scheduled airlines, five charter airlines, and four cargo airlines. So, there are a few firms are operating in the industry. Among them, Malaysia Airlines Berhad can be considered as one of the scheduled airlines. It accounts for 17.1 percent of the total marketplace.

So, Malaysia Airlines Berhad has a considerable monopoly power to control the market air ticket price and the number of air tours. 

Also, Malaysia Airlines Berhad depends on the actions of the other companies such as AirAsia, AirAsiaX, Malindo, and so on to make own decisions on the air ticket price, quality of the service is provided, and so on.

On the other hand decisions of the Malaysia Airlines Berhad affect the decisions of the other airline companies in the market.

So, we can see that firms in the Malaysian airline industry collude on price by setting a market price with the participation of every company in the marketplace.