Question

Why are there only a small number of businesses in the oligopoly industry, such as 2-3 car makers in the U.S. or three large cereal makers that control 80-90% of the market share?

Answer 1

An oligopoly is a market structure where two or more firms, each of which have significant influence on market.

Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. When there is a high concentration ratio in an industry, economists tend to identify the industry as an oligopoly. Example is given above where 2-3 car companies drive the car market in US or three large cereal makers enjoy 80-90% of the market share.

Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers.Firms in an oligopoly set prices, whether collectively – in a cartel – or under the leadership of one firm, rather than taking prices from the market. So, the firms are price makers, rather than price takers. So, it is preferrable to have as small number of competitiors as possible, so that each can have significant say in partnership and negotiations can be made more efficietly. Profit margins are thus higher than they would be in a more competitive market.

The conditions that enable oligopolies to exist include high entry costs in capital expenditures, legal privileges (license to use wireless spectrum or land for railroads), and a platform that gains value with more customers (social media).