The Economic Definition of an Oligopoly

 The Oligopoly market is defined as a market where only a few firms control the production of a large range of products. Under the Oligopoly, there is a condition that each firm produces: Homogeneous merchandise: The companies producing the homogenous products are known as Perfect or Pure Oligopoly. In some industries, it is found that the producer of a given type of merchandise is protected against entry by another firm that uses the same process, raw materials, and technology. However, the Pure Oligopoly does not provide protection to the producer but instead provides protection for the buyers. It is generally found in the producers of electrical products like copper, aluminium, iron, etc., where it is the monopoly of the producers, leaving the customers of other firms to buy them.

An oligopoly market in itself does not create the competitive conditions that are required to ensure a healthy market. The problem arises when there is a lot of Oligopoly in certain industries. Such kind of situation tends towards economic depression; as the Oligopoly causes a price increase in demand for the products of these firms. Therefore, to overcome such conditions, the government often nationalizes the industries involved.

Large scale mergers are another way of breaking the Oligopoly market and creating new firms that compete with the existing large firms. For instance, in airlines, it is common for the management to nationalize the airline industry as a whole and to unify the various air carriers into a smaller set of airlines. This was done by several large firms, which together now to form a new company. However, this does not mean that all the Oligopoly firms will merge together and create smaller, more competitive firms. Many Oligopoly firms prefer to maintain their independence and refuse to join together with other competitors, even if they do get into a large-scale merger.

The existence of a large number of Oligopoly firms tends to reduce the overall efficiency and quality of services. This is because in these industries, there is a tendency for prices to be controlled to serve only the needs of the bigger firms. For instance, it is often true that in the case of hospitals, there will be a strong tendency for prices to be controlled up until a particular limit, at which point, services will be increased. In industries like these, the quality of services should be maintained at all times, because even slight degradation in services can result in loss of customers and increasing losses. The existence of an Oligopoly also tends to reduce the innovation possibility, as the monopoly forces the providers to produce inefficient products.

The existence of a large number of Oligopoly market also tends to lower the level of competition, as each firm tries to preserve its existing level of profitability. Consequently, if the price level is too high, a new firm may not be able to come up with a better product. This has implications for increasing returns to the shareholders, as higher prices imply lower returns to the firms involved.

Finally, the existence of numerous Oligopoly firms reduces the level of innovation, as each firm is trying to protect its own uniqueness while being unable to introduce novel ideas. As a result, goods and services offered by these firms tend to remain static. The end result is a limited choice of consumers and imperfect competition. In short, a firm cannot adopt any innovations or improvements to make its product better, as the firms involved control the prices, the level of competition and the level of investment necessary to make the product better. These factors reduce the real value of the assets owned, which significantly diminishes the net value of the firm.

Read more about oligopoly meaning and its features advantages examples other economics and management topics on thekeepitsimple, especially for management and business students.