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8.2: Oligopoly

  • Page ID
    210858
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    The oligopoly market structure is very different from the other two market structures we have examined thus far. The significant differences are:

    • realism
    • interdependency
    • stable output and price

    Realism

    There are virtually no real-life examples of firms in a perfectly competitive industry. There are some industries that do come close (like some agricultural industries) but for the most part pose some degree of market power.

    Monopolies, like perfect competitors, are also rare. There are more real-life examples in this market structure but some firms that are believed to be monopolies are just very large fish swimming with minnows. Microsoft is often given as an example of a monopoly. Since Microsoft is not a one-product business, it competes in many different industries and therefore belongs to many different market structures. But the market structure that Microsoft is commonly assumed to monopolize is operating systems (think Microsoft Vista or XP). But even in the operating system industry Microsoft does not qualify as a monopoly (see figure 4).

    A pie chart showing the market shareDescription automatically generated

    Figure 4

    In 2009, their 92.77% market share, while impressive, was not total. So, Microsoft competes with many, albeit small, firms so it cannot be considered a monopoly in the operating system industry.

    So, there might be a few examples at the two extreme ends of the market structure spectrum but there are literally millions of examples in the middle.

    The oligopoly market structure lies somewhere between perfect competition and monopoly market structures. The larger firms in this market structure have substantial market power.

    Defining the Industry

    In the monopoly module, we established every firm belongs to an industry and every industry belongs to a specific market structure (see figure 5).

    A diagram of a companyDescription automatically generated

    Figure 5

    It is important to know that industries can be defined in more than one way. Some businesses produce goods or services that are like competitor offerings. In this case the firms are considered direct competitors because they are vying directly for the same customers.

    A firm in one industry can face a different level of competition (i.e., market structure) than a firm in a different. But it is important to examine each industry in two ways: broadly and narrowly (see figure 6).

    A diagram of a company structureDescription automatically generated

    Figure 6

    A narrow definition of an industry includes only direct competitors. Direct competitors are firms who produce very similar goods or services and compete directly for the same customers. A broad definition of an industry includes both direct and indirect competitors. Indirect competitors are firms who produce somewhat similar goods or services and compete indirectly for some customers. The video game industry can be used as an example. If the industry is defined as “video games”, then it is broadly defined. This is because many different game-based products (console, handheld, tablet, smartphone, PC, etc.) are included in this category. Some gamers may see a video game played on a console (e.g., PS5) as the same as a game on their smartphone but many do not. This makes the producer of the console (e.g., Sony) and the producer of the smartphone (e.g., Samsung) indirect competitors.

    If the industry is defined as “game console”, then it is narrowly defined. This is because there are only a few firms producing video games on a proprietary system (Microsoft/Xbox, Sony/PS5, Nintendo/Switch). Many gamers may see a video game played on one console as indistinguishable if played on a rival console. This makes the producer of consoles direct competitors.


    This page titled 8.2: Oligopoly is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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