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Oligopoly refers to a small number of bidding products. The word is derived from Greek and is formed by two different concepts: oligo meaning “few” and polio meaning “seller”. In this way, we can define oligopoly as a market of “few sellers”. Each seller who is part of this process is very aware of each other’ actions. Decisions made by one entrepreneur will affect others most of the time. Oligopolists often take advantage of their position to place higher prices and lower production. They are companies that collaborate with each other in order to maintain themselves and thus avoid competition.
Characteristics of oligopoly
- For the oligopoly participants, competition does not exist, as they have absolute control and dominance of the market.
- It often has access to its own resources in terms of advertising and marketing the company.
- They often use dumpling, which means lowering prices even below the cost of production and manufacturing to make a profit, and for this reason oligopolies have no competition.
- Among themselves, they make it difficult and sometimes prevent the entry of new companies into their circle.
- They have two types of goods: differentiated goods which are processed products and homogeneous goods, which refers to raw materials for the manufacture of products.
Types of oligopoly
- Differentiated: This market type has been developed by theorists who have entered into monopolistic or imperfect Within its characteristics, it includes a wide variety of manufactured products such as automobiles, detergents and airlines.
- Concentrated: This is one way in which market achieves industrial concentration. It tends to appear when there are few producers of a given raw material.
- Concentrated differentiation: It results from the combination of some elements that are present in the types mentioned above. Its main characteristic is product differentiation.
- Competitive: It is characterized by the high concentration in its production. They tend to make competition through their prices.
Advantages of oligopoly
- Oligopolistic companies have a great variety of means to avoid that their ideas are overtaken by other companies.
- When there is legal protection and competitive advantage in a given sector, companies benefit from greater freedom and tranquility to improve their services and products.
- Companies should not worry in short and medium term about the competition that could affect them.
- The members’ salaries tend to be high, since the quality of their products is never altered, and they do not need to reduce production prices.
- The internal workings of the company perform better.
- The products that consumers can buy from an oligopoly improve more and more every day and adapt to people’ changing tastes.
Disadvantages of oligopoly
- With the oligopoly, an abnormal situation is created which is marked by the permanence of a single company.
- Other companies’ access to the market is vetoed.
- The companies that are formed or are emerging around an oligopolistic business find a lot of limits in their activity.
- The sellers’ actions always affect other sellers.
- Product costs are high, quality is low in many of their products and services.
- The economy becomes weak and there is little opportunity for investors as there is very little competition and at the same time it generates fewer jobs.