An oligopoly is a state of limited competition. Within this structure, the market is shared by a small number of either sellers or producers. This market can form because of collusion, the introduction of new and superior technologies, or limited seller access.
In many ways, an oligopoly is the same as a monopoly. The only difference is that an oligopoly involves several firms, whereas a monopoly involves a single firm.
As with any market structure, there are certain pros and cons of an oligopoly that must be considered.
List of the Pros of an Oligopoly
1. It simplifies the market for consumers.
An oligopoly reduces competition, which means simpler choices for finding the best possible product. Different firms may offer similar products, so there is still some variety, but extensive research by the consumer is no longer required.
2. It creates higher profits.
In a perfect scenario, an oligopoly creates a trickle-down effect within an economy. Pricing provides higher profits, which can then filter down to become higher wages for employees. Higher wages mean more discretionary spending, which can help the GDP.
3. It puts resources into refinement.
Instead of directing resources into research and development, the firms within an oligopoly can push toward refinement instead of new development. Existing products can be made better. New efficiencies can be discovered. There is less of a need to directly compete with new and unknown firms, so there are fewer expenses to worry about.
4. It can still offer competitive pricing.
Competition lowers prices, but so does consumer supply and demand. Even in an oligopoly, if consumers don’t like a product, it won’t sell. If it is priced too high, it won’t sell either. Firms must balance the need for profits with a need to remain attractive to consumers and this formatting can still generate competitive pricing.
List of the Cons of an Oligopoly
1. Fewer choices isn’t always a good thing.
Fewer choices can save time, but what if all the available choices within the structure of an oligopoly are bad choices for the consumer? If no products meet the needs of a consumer, then there are no other options available. The consumer either goes with something that only partially meets their needs, while paying full cost, or they go without.
2. Trickle-down economics requires perfect ethics.
Profits can trickle down to employees and entry-level positions, but only if those receiving the large subsidies allow them to do so. Far too often, the Middle Class is eliminated in trickle-down economics because the rich hoard their resources and the poor are left to fight each other for what is left.
3. Innovation becomes non-existent.
An oligopoly discourages innovation by creating numerous barriers to market entry. Firms have no need to innovate because there aren’t new ideas being introduced to the market. That allows the market to maintain the status quo, even though consumers may have ever-evolving needs. At the end of the day, refinement is better than nothing, but it is never as good as new innovations.
4. Price fixing is common.
With a small number of firms in a market, they can collude together to fix the prices of the goods or services they sell. Pricing can be artificially inflated to generate excessive products and because there is little competition, consumers have no real alternative available to them. Market forces can still apply within an oligopoly, but only if consumers work together to form their own oligopoly to counter the market forces.
5. Market success usually translates into political success.
The leaders of the firms within an oligopoly find themselves wielding high levels of business power. That power can translate directly into political power. Some in the C-Suite of these firms might run for political office, but the buying power of the firms can fund political special interests to an extent that the general public cannot compete. Those special interests then persuade politicians to pass legislation that benefits the firms more than the people.
6. People become a commodity.
Business decisions are more important than people decisions in an oligopoly. Profits become king. If someone cannot contribute to the greater profits of the firms involved, then they are cast aside for someone who can contribute. In many ways, the structure of an oligopoly encourages a race to the bottom instead of a race to the top.
The oligopoly pros and cons show that the negatives of such a market structure can be devastating to a society. A few have the ability to profit well and find wealth, but the majority will find themselves fighting for whatever resources they can afford.
Brandon Miller has a B.A. from the University of Texas at Austin. He is a seasoned writer who has written over one hundred articles, which have been read by over 500,000 people. If you have any comments or concerns about this blog post, then please contact the Green Garage team here.