The advantages & disadvantages of an oligopoly

Written by steve jonathan
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In almost every market situation, there is healthy competition between suppliers to offer the best product at the most reasonable price to attract consumers. There is a substitute for almost every product and consumers are free to purchase a similar, less expensive product elsewhere. This enables both the consumer and the producer to affect price levels. There are, however, certain industries where alternative products are unavailable and only a limited number of suppliers, either because of technical capabilities or access to raw materials, provide the item in question. This market situation is an oligopoly.

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The Oligopoly Market

When an industry has only a limited number of suppliers, such as the oil or gas industries, or service providers such as airlines, these few companies are, to a certain extent, able to control the market. As the products they supply are often almost identical, the actions of one producer, for example in effecting a price cut, will directly affect the remaining suppliers. If the market for a particular item can only sustain a demand for 200 pieces, and there are only four producers supplying 50 pieces each, a price cut by Supplier 1 will immediately gain it a greater share of the market, thus obliging Suppliers 2, 3 and 4 to lower their prices.

The Advantages of Oligopoly

Having only a limited number of companies controlling a large proportion of a particular industry reduces the likelihood of one of the members making unjustified price increases. Should such an increase not be adopted by the remaining companies, the first supplier will simply lose its share of the limited market, as consumers will turn to the other providers for the identical product at the lower rate. Although the profit margin of the other companies may be slightly smaller, they will, of course, benefit from the subsequent increase in demand.

The Disadvantages of Oligopoly

In a normal market, it is supply and demand that mostly affect price. Should a consumer find a similar product offered by another provider at a cheaper price, he will make his purchase from that other provider. Suppliers will not, therefore, overinflate their prices because they will simply lose customers. In an oligopoly, there is little choice for consumers and this will negate any influence they may have had over price control. By the very nature of an oligopoly, providers in an industry with limited members are able between them to dictate the price of their product, as consumers are unable to find alternatives or substitutes elsewhere. Since in many countries collusion or conspiracy between companies to inflate prices is illegal, members of an oligopoly may follow signals given by its industry leader as to any imminent changes it proposes to implement.

The Perfect Market

Open competition in a market where prices are driven by consumer demand is healthy when it encourages suppliers to strive to improve their product while keeping prices attractive to potential purchasers. It may inspire them to develop new ideas that will appeal to their market and increase interest in their products. This bodes well for the consumer as there will be an ever-increasing range of products from which to choose. Oligopolies can, in their own way, also be of benefit to consumers even though choice becomes more restricted. Having the control of large industries such as oil or petroleum regulated by a few major providers, including the government, can ensure that affordable prices are maintained for essential needs and remain within the budget of the majority of households.

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