What is an oligopoly?

While you don’t need to be an economist to succeed in business, you do need to know your market. Whatever kind of business you run, and whatever products and services you offer, there’s a chance that you operate in an oligopoly. And you should tailor your strategic decision-making accordingly.

Here, we’ll look at the definition of an oligopoly and how it may apply to your business. We’ll also look at how an oligopoly can affect your business, and how to succeed when operating within an oligopolistic market. 

What is an oligopoly?

An oligopoly is somewhere between a monopoly (where one company has exclusivity over a market or industry) and monopolistic competition (where there are numerous companies entering and exiting a market). Unlike the latter, in an oligopoly, there are few enough competing companies that the actions of one can affect the practices of others. 

Barriers to entry tend to be relatively high, ensuring that competition remains limited, whereas in monopolistic competition, new companies arise and close constantly.

Is a duopoly the same as an oligopoly?

The term oligopoly is usually used to describe markets with three or more competing companies. However, a duopoly is technically a form of oligopoly. Two companies don’t need to exert complete control of the market in a duopoly, merely dominate a significant market share. Think of the duopoly between Coca Cola and Pepsi, United and American Airlines, Airbus and Boeing, or McDonald’s and Burger King. 

Characteristics of an oligopoly

An oligopoly is still a competitive market. But competition is certainly less fierce than monopolistic competition, where companies are much more tolerant of competitors and may even form partnerships. Monopolistic competition is like a game of Hungry Hungry Hippos, with firms scrambling to engage as many marbles (customers) as possible at the expense of their competitors. An oligopoly is more like a civil game of Go Fish.   

Some key characteristics of an oligopolistic market are:

• High barriers to entry, as existing brands are already trusted and ubiquitous 

• Generally slow to innovate

• Companies are “price makers” rather than “price takers”

• Sense of partnership and cooperation between competing companies

Examples of oligopolies

Some common examples of oligopolies include:

• Phone and internet carriers

• Oil companies

• Railroads

• Steel manufacturers

• Automotive

• Grocery store chains

Social platforms and big tech can also be considered oligopolies. 

All are able to coexist, even in the face of competition. And because it’s difficult for newcomers to set up shop in these markets, competitive analysis is fairly easy. 

Competing successfully in an oligopoly

Oligopolies have high barriers to entry. But if your company is undergoing a period of growth, expansion, or diversification, you may find yourself operating in an oligopoly. As such, you will be in direct competition with established and well-trusted brands: brands that command the loyalty of consumers who are unlikely to take a risk on an unproven brand like yours.

So, assuming you’re able to overcome the barriers to entry and play in the big leagues, how does your company compete successfully in an oligopoly?

You’ll need to take steps to slowly (and sustainably) build your market share. An oligopoly means much higher operational costs, so undercutting competitors on price is likely to decimate your profit margins. Instead, focus on non-price competition. Potential strategies include:

• Operating for longer hours, or providing 24/7 customer support

• Offering better quality of service, including guarantees and assurances

• Offering exclusive deals and first refusal on new product lines

• Building lucrative relationships with suppliers that customers know and trust

We can help

If you’re interested in finding out more about oligopolies, markets, and business finance, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.