What Is an Oligopoly?
When companies within the same industry work together to increase their mutual profits instead of exclusively competing with one another, it is known as an oligopoly. Oligopolies are observed throughout the world and even appear to be increasing in certain industries.
Unlike a monopoly, where a single corporation dominates a certain market, an oligopoly consists of a select few companies. Combined, these companies exert significant influence over a market or sector.
While these companies are still technically considered competitors within their particular market, they also tend to cooperate or coordinate with each other to benefit the group as a whole. For example, instead of competing to attract customers by lowering prices or offering better contracts, they may all use similar contracts or keep prices around the same level. This anti-competitive behavior can lead to higher costs and less favorable terms for consumers.
Key Takeaways
- Oligopolies occur when a small number of firms collude, either explicitly or implicitly, to restrict output or fix prices, in order to achieve above normal market returns.
- Oligopolies are different from monopolies, in which only one firm is the dominant producer in the industry.
- Examples of oligopolies can be found across major industries like oil and gas, airlines, mass media, automobiles, and telecom.
- The existence of oligopolies does not necessarily imply coordination or collusion between companies, though it can.
- Oligopolies often form in industries with a large barrier to entry, such as protected intellectual property or high start-up costs.
Understanding Oligopolies
An oligopoly is a market structure that consists of a small number of firms that have substantial influence over a certain industry or market. While the group holds a great deal of market power, no one company within the group has enough sway to undermine the others or steal market share. This prevents the structure from being a monopoly. As a result, prices in this market are moderate because of the presence of a certain degree of competition.
Because there is no dominant force in the industry, companies may be tempted to collude with one another rather than compete, which keeps non-established players from entering the market. This cooperation makes them operate as though they were a single company. While not a single-company-dominated monopoly, oligopolies erect significant barriers to entry, effectively keeping out new upstarts from becoming competitors.
Oligopolies can be created through coordination between companies. More often, though, they arise due to industry consolidation and protectionism, either due to government interference or other factors. The limited number of competitors creates an oligopoly, even if the companies aren't deliberately colluding with each other.
When one company sets a price, others will respond in fashion to keep their customers buying. But, because the level of competition is still relatively low compared to a free market with many players, prices are usually higher in an oligopoly than they would be in a system ofperfect competition. Customers don't have alternatives that they could use instead, which requires them to make a purchase from one of the companies in the oligopoly.
For example, if an airline cuts ticket prices, other players typically follow suit. But because the only competitors are a small number of airlines, and customers who need to travel long distances or overseas don't generally have options other than flying, prices still stay relatively high.
Determining Whether an Oligopoly Exists
The concentration ratio measures the market share of the largest firms in an industry and is used to detect an oligopoly. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.
Companies have the power to fix prices and create product scarcity without competition, which can lead to inferior products and services and higher costs for buyers. While limiting competition, oligopolies and monopolies can operate unencumbered in the U.S. as long as they do not violate antitrust laws. These laws cover:
- Unreasonable restraint of trade
- Plainly harmful acts such as price-fixing, dividing markets, and bid-rigging
- Mergers and acquisitions (M&A)that substantially lessen competition
Amonopolyis one firm holding concentrated market power, aduopolyconsists of two firms, and an oligopoly is two or more firms.
Industries With Potential Oligopolies
Throughout history, there have been oligopolies in many different industries, including:
- Steel manufacturing
- Oil
- Railroads
- Tire manufacturing
- Grocery store chains
- Wireless carriers
- Airlines
- Pharmaceuticals
Some of the most notable oligopolies in the U.S. are in film and television production, recorded music, wireless carriers, and airlines. Since the 1980s, it has become more common for industries to be dominated by two or three firms. Merger agreements between major players have resulted in industry consolidation.
The common denominator with these industries is a large barrier to entry. They tend to require a lot of initial capital investment. For example, it is expensive to purchase airplanes or to develop and market medication, which limits the number of new businesses that can enter the industry. Industries that are prone to oligopolies may also have intellectual property protections such as patents and trademarks that effectively keep out competitors and favor incumbents.
Traders can look to oligopolistic industries to set up potential pairs trades.
Current Examples of Oligopolies
Today, several well-known oligopolies exist. Some of these include well-known or household names in key industries or sectors.
Mass Media
National mass media and news outlets are a prime example of an oligopoly, with the bulk of U.S. media outlets owned by just four corporations:
- AT&T (T)
- Comcast (CMCSA)
- Walt Disney (DIS)
- Charter Communications (CHTR)
New players like Amazon and Netflix initially disrupted the industry with the rise of streaming media. Over time, however, they became part of the oligopoly. Smaller players continue to remain shut out.
Big Tech
Operating systems for smartphones and computers provide excellent examples of oligopolies in big tech. Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are overshadowed by Apple and Microsoft Windows.
Big tech also is concentrated when it comes to internet companies, with Google, Meta (formerly Facebook), Microsoft, and Amazon dominating.
In August 2024, a federal judge ruled that Google, owned by parent company Alphabet Inc. (GOOG), engaged in illegal practices to maintain a monopoly over online search. Though the ruling didn't contain remedies or a decision to break up Google, it was widely seen as a major moved toward breaking up or limiting the power of big tech firms through antitrust action.
Automakers
Automobile manufacturing is another example of an oligopoly. Though cars are available at different price points, those prices are related more to the trim and model of the car itself. Luxury vehicles across all manufacturers are in similar price points, whereas more budget cars will also be at similar price points across manufacturers.
Leading auto manufacturers in the United States are Ford (F), GM, Stellantis (the new iteration of Chrysler through the merger of Italian–American Fiat Chrysler Automobiles and French PSA Group), and in the past few years, Tesla. Worldwide there are only a few more major automakers including Toyota, Hyundai Motor Group, Honda, Volkswagen Group, and Renault-Nissan-Mitsubishi.
Sometimes independent companies within an industry are closely tied together, which can decrease competition between them and further cement the existence of an oligopoly. Subaru Corporation, which owns the Subaru brand, is an independent automaker. However, the company collaborates with major auto manufacturer Toyota on several models, such as the BRZ and the Solterra (which is built in a Toyota factory). Toyota also has a stake in the Subaru Corporation, further creating overlap between the interests of the two companies.
Telecom
Once an actual monopolistic corporation, AT&T was famously split up due to antitrust ruling into several "Baby Bells." These spinoffs now maintain an oligopoly in the landline and mobile phone provider space, including Verizon (VZ), T-Mobile (TMUS), and AT&T (T).
Entertainment
Hollywood has long been an oligopoly, with a select few movie studios, film distribution companies, and movie theater chains to choose from. Though independent production companies and local movie theatres exist, the larger corporations dominate the industry and set the standard for everything from how actors are paid to how movies are distributed.
There is also a great deal of overlap between the businesses that control the industry. Within the top 15 major production studios, for example, many are subsidiaries of other large media corporations—sometimes the same large media corporations as others on the list.
In 2022, the top movie production companies in the world were:
- Village Roadshow Productions
- Pixar Animation Studios (owned by Walt Disney Co.)
- Relativity Media
- Amblin Entertainment, Inc.
- DreamWorks Animation LLC (owned by Comcast Corporation)
- Access Entertainment
- Legendary Pictures Productions, LLC
- New Line Cinema (owned of Warner Brothers Discovery)
- 20th Century Studios (owned by Walt Disney Co.)
- Paramount Pictures Corporation
- Columbia Pictures Industries, Inc. (owned by Sony)
- Universal City Studios LLC (owned by Comcast Corporation)
- Warner Bros. Entertainment, Inc. (owned by Warner Brothers Discovery)
- Walt Disney Studios (division of Walt Disney Co.)
The music entertainment industry, too, is dominated by only a handful of producers, many of whom also own some of the top movie production companies. These include Universal Music Group, Sony, and Warner.
Airlines
The United States airline industry today is arguably an oligopoly. As of 2021, there are four major domestic airlines: American Airlines Inc. (AAL), Delta Air Lines Inc. (DAL), Southwest Airlines (LUV), and United Airlines Holdings Inc. (UAL).
Combined, these airlines fly just over 65% of all domestic passengers. The next single carrier that flies the largest share of passengers, Alaska Airlines, flies just over 6% of all domestic passengers in the United States.
What Are the Characteristics of an Oligopolistic Industry?
Oligopolies tend to arise in an industry that has a small number of influential players, none of which can effectively push out the others. These industries tend to be capital-intensive and have several other barriers to entry such as regulation and intellectual property protections.
Which Industries Are Oligopolistic?
Oligopolies exist in several industries from mass media and entertainment to carmakers and airlines to segments of big tech. Industries where smaller companies have been bought out or merged, or where large corporations dominate, tend to have oligopolies.
What Causes an Oligopoly?
If conditions are right, companies in the oligopoly will come to realize that they are best served individually not by competing tooth-and-nail. Instead, they can achieve higher profits by coordinating and cooperating on particular aspects of business, such as setting prices or limiting customer options.
Are Coca-Cola, Netflix, or Nike an Oligopoly?
Each of these companies could be considered part of an oligopoly in their respective industries.
The Bottom Line
Oligopolies exist naturally or can be supported by government forces as a means to better manage an industry. Customers can experience higher prices and inferior products because of oligopolies. However, this does not happen to the extent that it would through a monopoly, as oligopolies still experience competition.
The majority of the industries in the U.S. have oligopolies that are dominated by a few large corporations. This creates significant barriers to entry for those wishing to enter the marketplace.
