Introduction to Oligopoly

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When discussing different types of market structures, monopolies are at one end of the spectrum, with only one seller in monopolistic markets, and perfectly competitive markets are at the other end, with many buyers and sellers offering identical products. That said, there is a lot of middle ground for what economists call "imperfect competition." Imperfect competition can take a number of different forms, and the particular features of an imperfectly competitive market has implications for the market outcomes for consumers and producers.

Oligopoly is one form of imperfect competition, and oligopolies have a number of specific features:

  • Several large firms - Oligopolies generally consist of a few large firms, and this is part of what sets them apart from competitive markets.
  • Similar or identical products - While it is possible to have an oligopoly with slightly differentiated products, firms in oligopolies usually sell non-differentiated products.
  • Barriers to entry - There are barriers to entry into an oligopoly, making oligopolies different from competitive markets with a large number of relatively small firms.

In essence, oligopolies are named as such because the prefix "oli-" means several, whereas the prefix "mono-", as in monopoly, means one. Because of barriers to entry, firms in oligopolies are able to sell their products at prices above their marginal costs of production, and this generally results in positive economic profits for firms in oligopolies.

This observation of markup over marginal cost implies that oligopolies do not maximize social welfare.

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Beggs, Jodi. "Introduction to Oligopoly." ThoughtCo, Mar. 27, 2017, thoughtco.com/introduction-to-oligopoly-1146809. Beggs, Jodi. (2017, March 27). Introduction to Oligopoly. Retrieved from https://www.thoughtco.com/introduction-to-oligopoly-1146809 Beggs, Jodi. "Introduction to Oligopoly." ThoughtCo. https://www.thoughtco.com/introduction-to-oligopoly-1146809 (accessed November 22, 2017).