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A market which is dominated by a small number of sellers. The word is derived from the Greek for few sellers. As there are few participants, each seller is aware of the actions of the others. The decisions of one seller influence, and are influenced by the decisions of other sellers. Strategic planning by oligopolists must take into account the likely responses of the other market participants. An oligopoly can be quantified using the four-firm concentration ratio, the percentage of the market share accounted for by the four largest firms in an industry. Using this measure, an oligopoly may be defined as a market in which the four-firm concentration ratio is above say 40%. The Herfindal index is another useful measure.
In industrialized countries, oligopolies are found in many sectors of the economy, such as cars, consumer goods and steel. In regulated markets such as wireless communications, the state often licenses only two or three providers of cellular phone services, effectively creating an oligopoly. Marketing professor, Jagdish Sheth has coined the Rule of Three. In many industries, equilibrium is reached when there are three main players.
Oligopolistic competition can result in various outcomes. Firms may collude to raise prices and restrict production in the same way as a monopoly. In some industries, there may be an acknowledged market leader who informally sets prices to which other producers respond. In other situations, competition between sellers can be fierce, with relatively low prices and high production. This can lead to an efficient outcome approaching perfect competition. Competition would be less if the firms are regional and do not compete directly with each other.
Oligopsony is a type of market in which the number of buyers are small while the number of sellers is large. A small number of firms compete to control the inputs of production.
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