What is an Oligopoly? - Definition & Impact on Consumers

What is an Oligopoly? - Definition & Impact on Consumers
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  • 0:04 What Is an Oligopoly?
  • 0:36 Examples of Oligopoly
  • 3:02 Oligopolistic Behavior
  • 5:46 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

In this lesson, we will discuss a market structure that is actually quite common in the United States, as well as most other industrialized countries: oligopolies. Oligopolies are the market structures that sit somewhere between a monopoly and perfect competition. In this lesson, we will find out how.

What Is an Oligopoly?

An oligopoly is a market structure where a few, large firms control most of the market. If you think about a monopoly, where a single entity controls the entire market, or perfect competition, where there are many smaller companies selling the same goods and services, we needed to find a happy medium - something between having a store on every corner but not having one brand that rules them all. So, oligopolies were formed.

Examples of Oligopoly

Once again, to understand how these industry structures work, it's helpful to think about an industry you are familiar with that could be an oligopoly. For our purposes here, let's say if there are three to four companies that control most of the market, it's an oligopoly. Utility companies are often set up as regional monopolies, so they don't help us. Gas stations are closer to perfect competition, so that doesn't provide much insight.

Take a second and think about it: what industry in the United States has three to four companies that essentially rule the market? I bet you thought of a few: maybe oil companies, maybe airlines, maybe public accountants. All excellent examples. For our example, let's use one we are probably all familiar with, and one that constantly shows us how oligopolies behave towards each other and customers: mobile phone providers.

So, in the mobile telephone market, we really have AT&T, Verizon, T-Mobile, and Sprint. There are others in there: StraightTalk, Cricket, U.S. Cellular, and Boost. One of the most important things to remember about an oligopoly is that the big players are not the only players in the market; they just have a significant amount of the market share. If the eight providers I listed above all have about 10% market share, and a few smaller companies made up the rest of the market, we wouldn't have an oligopoly.

But, take a guess at how much market share the top four providers have. What do you think? 50? 65%? 80%? Well, AT&T and Verizon both have about 34% each, so there goes 68% of the pie. T-Mobile has about 16%, and Sprint has about 15%. That means the top four competitors in the mobile phone industry have 99% of the market! Now, next time you hear the Justice Department tell AT&T they can't acquire Sprint, it might make more sense. An AT&T that owned Sprint would have 50% market share!

Oligopolistic Behavior

Why do we care that a few big companies have so much market share? Or, do we? How does it change their behavior as competitors or our behavior as consumers?

First of all, think about the pricing behavior. In a monopoly, if the company raises its prices and you need the product, you have to pay the price. In perfect competition, if a company raises its prices, no one goes there because the same stuff can be bought somewhere else for cheaper. Soon, all the producers have to follow suit to get their customers back. This hypothetical example probably demonstrates most clearly, why, generally speaking, competition is good for consumers.

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