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Market Structure:
Oligopoly

By: Dafniejo P. Tobeo

Course: BA 505 – Economics Theory and Policy

Professor: Dr. Glenn Sadiangcolor
 This week’s topic is all about market structure that will focuses on oligopoly. Since two
reporters were assigned for this topic, my report only covers defining oligopoly, stating its key
characteristics, the natural and artificial barriers to entry, and identifying the advantages and
disadvantages of this market structure.
I started my discussion by making a graph presenting the X and Y axis, where X axis will
represent the number of competitors present in the market and the Y axis represent the product
differentiation. On this graph, I was able to illustrates the four type of market structure (Monopoly,
Perfect Competition, Monopolistic Competition, and Oligopoly) in terms of product differentiation
and number of competitors. With the help of that graph, it become easy for me to describe each
market structure.
Discussion about what is oligopoly comes next. As I mentioned in the discussion of the
graph, it is a market form wherein a market or industry is dominated by a small number of large
sellers. I cited different examples of oligopolies such as airlines companies, telecommunications
companies, resorts and many more. Our professor says that automobile companies are also
example of oligopoly.
The next topic that I discussed is about the key characteristics of oligopoly. These are
interdependence, information and strategy, and barriers to entry. It was all true since it happens in
real life. Firms operating in an oligopoly market with a few competitors must take the potential
reaction of its closest rivals into account when making its own decisions. Also, because firms
cannot act independently, they must anticipate the likely response of a rival to any given change
in their price, or their non-price activity. When it comes to barriers to entry, oligopolies frequently
maintain their position of dominance in a market might because it is too costly or difficult for
potential rivals to enter the market. Due to these barriers to entry, I also discussed the different
natural and artificial barriers which includes the following: economies of large scale production
which means if a market has significant economies of scale that have already been exploited by
the incumbents, new entrants are deterred. Ownership or control of a key scarce resource that
other firms would like to use creates a considerable barrier to entry, such as an airline controlling
access to an airport. High set-up costs deter initial market entry, because they increase break-even
output, and delay the possibility of making profits. And high R&D costs such as spending money
on Research and Development (R & D) is often a signal to potential entrants that the firm has large
financial reserves. In order to compete, new entrants will have to match, or exceed, this level of
spending in order to compete in the future. Moreover, artificial barriers include predatory pricing
when a firm deliberately tries to push prices low enough to force rivals out of the market, limit
pricing which means the incumbent firm sets a low price, and a high output, so that entrants cannot
make a profit at that price, superior knowledge can deter entrants into the market, predatory
acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a
controlling interest, or by a complete buy-out, advertising is another sunk cost - the more that is
spent by incumbent firms the greater the deterrent to new entrants, a strong brand creates loyalty,
‘locks in’ existing customers, and deters entry, loyalty schemes, exclusive contracts, patents and
licenses which make entry difficult as they favor existing firms who have won the contracts or
own the licenses, and vertical integration can ‘tie up’ the supply chain and make life tough for
potential entrants.
Knowing those barriers, it was very clear for me why most oligopoly companies is more
stable than those ordinary companies. Competition is steep but once you’re in, you have a high
chance of being profitable. A firm with small capital will not be able to compete with those large
firms. Even an entry in the market will not be possible.
 Another topic assigned to me is the discussion of the advantages of an oligopoly.
Oligopolies may adopt a highly competitive strategy, in which case they can generate similar
benefits to more competitive market structures, such as lower prices. Oligopolies may be
dynamically efficient in terms of innovation and new product and process development. The super-
normal profits they generate may be used to innovate, in which case the consumer may gain. Price
stability may bring advantages to consumers and the macro-economy because it helps consumers
plan ahead and stabilizes their expenditure, which may help stabilize the trade cycle.
And of course, if there were advantages, there are also disadvantages in oligopoly, there
are the following, High concentration reduces consumer choice, Cartel-like behavior reduces
competition and can lead to higher prices and reduced output. Given the lack of competition,
oligopolies may be free to engage in the manipulation of consumer decision making. Firms can be
prevented from entering a market because of deliberate barriers to entry. There is a potential loss
of economic welfare. Oligopolies may be allocatively and productively inefficient.