Understanding How Oligopoly Market Works and Its Principles

What is Oligopoly?

Oligopoly is a business system with a limited number of firms. Hence, none of them can keep substantial control from others. The concentration ratio tests the greater companies’ market share. A monopoly is one firm, two firms are a duopoly, and two or more firms are an oligopoly. There is no fixed top limit to the number of firms in an oligopoly. But the number must be so small that one firm’s acts have a major impact on the other.

Key takeaways

  • An oligopoly is a position when a small number of companies plan to limit production and/or set costs, either directly or tacitly, to obtain above-normal market returns.
  • Political, legal, and technological factors can contribute to the creation and maintenance of oligopolies or their extinction.
  • The greatest obstacle facing oligopolies is the prisoner’s difficulty faced by each member, will allow each member to cheat.
  • Government policy can deter or promote oligopolistic behavior, and companies in mixed economies try ways to reduce competition from government blessings.

Historically, oligopolies included steel mills, oil companies, railroads, tire manufacturers, supermarket stores, and wireless carriers. The economic and legal problem is that the oligopoly will obstruct potential entrants, delay innovation, and price rises, both of which are negative for customers.

Factors helping in the existence of oligopolies

The factors that allow oligopolies to exist include high capital expenditure entry costs, legal privilege, and a network that is gaining popularity with more clients (social media). Google Docs has targeted Microsoft in the office software application space, which Google financed using cash from its web search company.


The firms ought to consider the advantages of partnership over the costs of economic rivalry. Then, decide not to compete and focus on the advantages of cooperation instead. Companies have also sought innovative ways to prevent the possibility of price manipulation, such as using moon phases. Another strategy is for businesses to follow an agreed market leader; when the leader raises prices, the others follow. The fundamental issue facing these businesses is that every business has an opportunity to cheat.

If all oligopoly firms agree to limit supply and sustain high prices mutually. This kind of rivalry can be waged through prices, or simply by the expansion of its production brought to market. It can be accomplished through contractual or market conditions, legal restrictions, or strategic relationships between oligopoly members, which allow cheaters to be punished. Alternatively, oligopolies in mixed economies also try to lobby for favorable policies to function under government agency control or even direct oversight.


Depending on the number of companies, an oligopoly can end up looking more like a monopoly or a competitive market. There is a little guarantee on how businesses form an oligopoly. Hence, it depends on the company’s goals, the market’s con-testability, and the quality of the product.