Oligopoly
An oligopoly (from Ancient Greek ὀλίγος (olígos) 'few' and πωλέω (pōléō) 'to sell') is a market in which pricing control lies in the hands of a few sellers.
[5][clarification needed] In this situation, each company in the oligopoly has a large share in the industry and plays a pivotal, unique role.
[6] Many jurisdictions deem collusion to be illegal as it violates competition laws and is regarded as anti-competition behaviour.
The EU competition law in Europe prohibits anti-competitive practices such as price-fixing and competitors manipulating market supply and trade.
In the US, the United States Department of Justice Antitrust Division and the Federal Trade Commission are tasked with stopping collusion.
In Australia, the Federal Competition and Consumer Act 2010 details the prohibition and regulation of anti-competitive agreements and practices.
[7] Many industries have been cited as oligopolistic, including civil aviation, electricity providers, the telecommunications sector, rail freight markets, food processing, funeral services, sugar refining, beer making, pulp and paper making, and automobile manufacturing.
[14] Entry barriers include high investment requirements, strong consumer loyalty for existing brands, regulatory hurdles and economies of scale.
These barriers allow existing firms in the oligopoly market to maintain a certain price on commodities and services in order to maximise profits.
[17] One form of collusive oligopoly is a cartel,[18][better source needed] a monopolistic organisation and relationship formed by manufacturers who produce or sell a certain kind of goods in order to monopolise the market and obtain high profits by reaching an agreement on commodity price, output and market share allocation.
However, the stability and effectiveness of a cartel are limited, and members tend to break from the alliance in order to gain short-term benefits.
Recognising this vulnerability, established sellers will reach a tacit understanding to raise entry barriers to prevent new companies from entering the market.
Even if this requires cutting prices, all companies benefit because they reduce the risk of loss created by new competition.
[36] In other words, firms will lose less for deviation[clarification needed] and thus have more incentive to undercut collusion prices when more join the market.
[37] Greater market transparency, for instance, would decrease collusion, as oligopolistic companies expect retaliation sooner where changes in their prices and quantity of sales are clear to their rivals.
[37] Large capital investments required for entry, including intellectual property laws, certain network effects,[38] absolute cost advantages,[39] reputation, advertisement dominance,[40] product differentiation,[41] brand reliance, and others, all contribute to keeping existing firms in the market and precluding new firms from entering.
[27] The variety and complexity of the models exist because numerous firms can compete on the basis of price, quantity, technological innovations, marketing, and reputation.
The mechanism behind this model is that even by undercutting just a small increment of its price, a firm would be able to capture the entire market share.
Economists Kreps and Scheinkman's research demonstrates that varying economic environments are required in order for firms to compete in the same industry while using different strategic variables.
[55] The fermentation of distilled spirits takes a significant amount of time; therefore, output is set by producers, leaving the market conditions to determine price.
This model predicts that more firms will enter the industry in the long run, since market price for oligopolists is more stable.
[64] Oligopolies are assumed to be aware of competition laws as well as the repercussions that they could face if caught engaging in anti-competition behaviour.
In lieu of explicit communication, firms may be observed as engaging in tacit collusion, which occurs through competitors collectively and implicitly understanding that by jointly raising prices, each competitor can achieve economic profits comparable to those achieved by a monopolist while avoiding breaches of market regulations.
Leniency programs encourage antitrust firms to be more proactive participants in confessing collusive behaviours by granting them immunity from fines, among other penal reductions.
Nonetheless, leniency programs may be abused, their efficacy has been questioned, and they ultimately allow some colluding firms to experience less harsh penalties.
[66] Structural screening refers to the identification of industry traits or characteristics, such as homogeneous goods, stable demand, less existing participants, which are prone to cartel formation.
[71] For example, EU competition law has prohibited some unreasonable anti-competitive practices, such as directly or indirectly fixing selling prices, manipulating market supplies and controlling trade among competitors.
[72] In the US, the Antitrust Division of the Justice Department and Federal Trade Commission was created to fight collusion among cartels.
[76] Many industries have been cited as oligopolistic, including civil aviation,[77] agricultural pesticides,[77] electricity,[78][79] and platinum group metal mining.
[86] In the United States, industries that have identified as oligopolistic include food processing,[61] funeral services,[87] sugar refining,[88] beer making,[89] pulp and paper making,[90] the (duopolistic) two-party political system, [citation needed] mobile network carriers[91] and the big three of automobile manufacturing.
