The three most usual characteristics of an oligopoly are:
1. A couple of large companies dominate one industry
2. These companies sell identical or distinguishable products
3. The companies have significant blockades for other entrants
A couple of big companies
Of the above characteristics of an oligopoly, the most recognizable characteristic of oligopoly is dominance of an industry by a couple of big companies, with each fairly big when weighed against the total volume of its market. As a result, each of the bigger companies gets a substantial share of the market. Though each company may not have dominance of market to the extent of being monopolistic, it surely is better off than a monopolistically aggressive firm.
The number of all the firms put together is not the main consideration for deciding the oligopolistic features of a company. There could be a number of firms, yet it could be a monopolistic business. What matters is that a couple of companies could be large, compared to the total market for the product. For instance, if an industry has hundreds of firms, it could be oligopolistic in case just six of the top companies produced half of the total output of that industry.
For example, market for Shady Valley soft drink may have twenty companies but it will be termed oligopolistic if four of the biggest companies produced more than sixty percent of total sales and eight companies at the top produced nearly eighty percent. Thus, Shady Valley displays characteristics of an oligopoly.
Identical or distinguished products
While some oligopolistic industries manufacture the same products but others may manufacture distinguished products. So, oligopolistic industries generally have two varieties:
- Identical product oligopoly: This kind of oligopoly is likely to produce raw materials or intermediary products that are required as raw materials for other industries. Notable examples would include steel, petroleum and aluminum.
- Distinguished product oligopoly: This kind of oligopoly is inclined to concentrate on products needed for personal use. This is because consumers have different requirements and like to have a variety. Some examples would be automobiles, computers and detergents.
Barricades for entry
Companies in oligopolistic business continue having a hold on the market because of barricades to enter that business. The most common form of barriers include: Copyrights and patents; high capital investment; restrictions from government and exclusive rights to resources.
Barricades for entering the business are the main features that disconnect oligopoly from monopoly. If there are few barriers, companies may enter monopolistic industries if existing companies are making profits and thus reduce their hold on market. But when the barricades are extensive, it become quite difficult for new entrants, allowing the existing companies to enjoy their hold on market.
Suppose the market for athletic shoes in Shady Valley is dominated by the Master Foot Company and OmniRun, Inc. Both the companies have been producing athletic shoes for many years. Their brand names are established and their factories equipped with the latest machines, offering them economies of scale for mass production. Additionally, each has some patents for its products. So, both the companies fulfill the characteristics of an oligopoly.
Now, any other company keen to enter this field will have to face these barricades:
At the outset, the new entrant needs to invest in construction of new factory and other machinery for manufacturing shoes. The initial low volume of sales will be discouraging for any new entrant that would find it hard to achieve economics of manufacturing and thus sell its products at competitive prices.
The new entrant will have to incur substantial expense for advertising and promoting its product.
The new company would have to think of ways to circumvent the patents already possessed by the other two companies.
Yet, a new company may enter such an oligopolistic market, but the task would certainly be more challenging than entering another industry having fewer barricades.