Types of oligopolies

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Types of oligopolies
The soft drinks market is a very obvious oligopoly. (Justin Sullivan/Getty Images News/Getty Images)

An oligopoly is a situation where several sellers dominate a particular market. This often leads to a lack of price movements: if a seller increases prices he will lose business to rivals, while if a seller cuts prices his rivals will usually follow suit leaving everyone with lower takings. Oligopolies can be broken down according to several characteristics.

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Narrow vs wide

The precise definition of oligopoly can vary. In the widest definition it can cover any situation that falls between a pure monopoly (only one seller) and perfect competition (multiple sellers and buyers with no barriers to entry.) Usually though it refers to a more specific situation: one in which there are many buyers but few sellers, with barriers of entry making it hard for new sellers to get into the market. It's important to check the context in which the term "oligopoly" is used: some writers may use it less in relation to the characteristics of the market in question and more in relation to the effects it has on price and competition.

Pure

Oligopolies can also fall into two categories, impure and pure. In a pure monopoly, the sellers are selling identical (homogenous) goods and services. Examples include metals such as gold or oil. The theories of how oligopolies affect markets are more likely to be borne out by reality in a pure oligopoly.

Impure

In an impure oligopoly, the sellers are selling goods that are not entirely identical (homogenous). The differences could be as simple as branding of otherwise identical products. Alternatively the differences could be distinctive without changing the basic product, for example rival brands of cola drink. In an impure oligopoly, these differences limit some of the price effects. For example, if Pepsi put up prices or Coca Cola cut prices, some consumers would remain with their chosen brand rather than switch to what was now the cheaper option.

Cartel

In some oligopolies, sellers all increase their prices and maintain them at a higher level. This reduces the problem of consumers switching to an alternative, cheaper seller. The effect of these across-the-board price rises is similar to that which occurs in a true monopoly. Such situations are known as a cartel when the firms have actively agreed to fix prices and tacit collusion when it happens without a formal agreement or arrangement.

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