Table of Contents
What is an Oligopoly?
An oligopoly refers to a market structure where two or more companies or entities supply a particular commodity. Their decisions do significantly affect one another, but none has enough market share to corner the whole market.
The mutual interdependence of participants is an important detail to remember. As we mentioned above, their actions significantly affect one another. Companies cannot operate without considering their ‘competition’ (more on this later), otherwise, they run the risk of failure. If one entity alone decides to hike up its prices considerably, then consumers will likely seek out competing options. Especially if the quality and accessibility of each seller’s goods are similar.
For example, economists have viewed the global automobile industry as an oligopoly. Yale professor Pinelopi Kouijanou Goldberg published a 1995 study in which she found the U.S. automobile market most closely resembled an oligopolistic model.
DID YOU KNOW?
A monopoly refers to a market structure where one entity supplies a particular commodity.
A duopoly refers to a market structure where two entities supply a particular commodity.
Types of Oligopolies
When all firms own roughly the same amount of market share, the oligopoly is symmetric. If market share varies, then the oligopoly is asymmetric.
Also, the commodity itself can also differentiate companies involved in an oligopoly. Each may produce goods that are homogeneous/undifferentiated (a.k.a. a ‘pure oligopoly’), or it may produce goods that are heterogeneous/differentiated (a.k.a. a ‘heterogeneous oligopoly’).
The automobile industry would be a heterogeneous oligopoly as the cars themselves have different designs, functions, etc.
Have you wondered why U.S. drug prices are so much higher than in other countries? The RAND Corporation, a nonprofit, used 2018 data to conduct a study finding that prescription drug prices in the U.S. are 256% higher vs other countries. See whether the Zero Theft community has voted that the pharmaceutical industry is ripping off the U.S. public.
Most research assumes a symmetric oligopoly, particularly a duopoly, to determine how participants act knowing that they are mutually interdependent. The variances between the products often do not factor so much into research.
Oligopoly theory differs based on one fundamental question: do the participants behave cooperatively?
If yes, they collude in order for each party to generate as much money as possible via price fixing.
If no, the researcher assumes that firms behave independently or non-cooperatively. Non-cooperative oligopoly theory has models based on commodity quantities (Cournot competition) and prices (Bertrand competition).
Why do Oligopolies Exist?
Oligopolies can emerge due to a wide range of barriers to entry to potential competition.
Take the pharmaceutical industry, for example. Multiple companies might develop their own drug to cure a disease and apply for a patent. If the government grants patents to two or more of these companies, then an oligopoly (for the lifespan of the patents) gets established.
Corporations can also create further barriers to entry by threatening patent litigation. Any slight infringement could have a small company fighting multiple court cases from a massive corporation.
As a side note, pharmaceutical companies have been known to strike pay-for-delay deals. That’s where a brand-name drug manufacturer will pay generic manufacturers to delay releasing their biosimilar drug. This allows both parties to profit, but only at the great expense of the public. According to the FTC article just linked, these “anticompetitive deals cost consumers and taxpayers $3.5 billion in higher drug costs every year.”
Quantity Demand and Market Scale
Quantity demand and market scale can often create barriers to entry. Companies ideally want to produce just the right amount, so they achieve the minimum cost per unit (per the average cost curve).
In a low-demand market, the output necessary to get anywhere close to the minimum cost per unit might be double or triple what the amount people buy. Or in a limited market, maybe only two or three oligopoly firms can co-exist before the business becomes unsustainable for all involved.
Thus, market scale and demand can deter competition. That’s how Airbus and Boeing have created a duopoly in the large plane market, collectively holding 99% of the market share.
Consider how hard small businesses (and even massive corporations at times) have carving out their own space in an established market. It’s not so hard for, say, an emerging pharmaceutical company to generate buzz if they can produce a revolutionary drug. Granted, that’s a big if, but the company would be producing a completely new product that no one else offers.
But how does a new clothing company, beverage company, or toothpaste company stake their claim in their respective markets?
By providing quality products, sure. Likely, as far as the products themselves go, they won’t be reinventing the wheel. A lot of it comes down to how they differentiate themselves through marketing, creating a unique brand image that resonates with consumers to the point that they’re willing to jump ship from a brand they know and trust. This takes time, effort, and sometimes money. The question is: Can the company survive long enough to develop enough brand recognition?
Megacorporations and their lobbyists could be heavily influencing legislation and regulation. Do your part and protect the U.S. economy by joining the Zero Theft Movement.
Collusion, Cartels, and Competition
Oligopolies have the temptation of avoiding competition and colluding to collectively boost profits at the expense of consumers. Participating entities can do this by agreeing to adjust supply or price. When a group makes a formal agreement to collude, then you have a cartel.
You won’t find many true examples of cartels as the U.S. (and many other countries) have outlawed anti-competitive behavior under antitrust law. By making a formal agreement, participants would likely leave hard evidence of collusion. Regulatory agencies, without proof, cannot charge companies for violating antitrust laws.
Therefore, companies conceive of schemes to collude clandestinely in order to make changes in supply or price appear natural. A massive case of collusion arose in recent years involving 26 generic drug manufacturers. Most U.S. states accused them of fixing drug prices, including those of long-standing antibiotics.
These relations between companies may not actually be so stable in practice. While oligopolists know that they can all benefit from collusion, they each know by slightly increasing their own supply, they can bring in more revenue. If enough of them succumb to the temptation, the market price will drop due to ample supply. The prospect of prices dropping for everyone can deter participants from violating the agreement.
The Oligopoly Adaptation of the Prisoner’s Dilemma
Game theorists have made an oligopoly adaption to the Prisoner’s Dilemma. In the original version, two people get caught in the act of robbing a bank. They each can either confess or stay silent.
- If both confess, they will get a 4-year sentence
- If one confesses and the other does not, the former gets no jail time and the latter gets 3 years in jail
- If neither confesses, they will get a 2-year sentence
When it comes to oligopolies, the delicate dance depicted in the previous section comes to the fore. Will I raise my supply to gain extra profits? Are others going to raise their supply? Am I OK with following the terms of the agreement even though others might cheat? Can I trust the fellow participants?
We can visualize the problem as follows:
Let’s run through the dilemma from the perspective of Firm A:
- If I think that Firm B will cheat on our agreement by increasing their output, then I, too, will increase my output. $50,000 (the bottom right-hand choice) is better than $30,000 (upper right-hand choice), right?
- If I think that Firm B will stay true to our agreement to produce only a certain amount, then I might decide to increase my production to boost my profits. I could earn $150,000 (bottom left-hand choice) as opposed to $100,000 (upper left-hand choice). There’s also no chance I will make anything less than $50,000.
When you spread this model over three, four, five, etc. participants, the choice can possibly become even harder. Also, in reality, participants will not make these decisions at the same time, with all the monetary ramifications known beforehand. They will act and react in real-time, using whatever information they have about others in the oligopoly.
Oligopoly in the U.S.
Bruno Pellegrino, a professor at the University of Maryland’s Robert H. Smith School of Business, published a 2019 study investigating industry concentration and rises in corporate profits. He discusses how a trend towards mergers and startup acquisitions has reduced the number of competitors in many markets. In turn, that has led to what he has termed as ‘deadweight loss’—in other words, loss of efficiency.
“I estimate a large deadweight loss from oligopolistic behavior, equal to 11% of the total surplus produced by public firms…The distributional effects of oligopoly are quantitatively important as well: under perfect competition, consumer surplus would double with respect to the oligopolistic equilibrium. I also estimate that the deadweight loss has increased by at least 2.5 percentage points since 1997. The share of surplus that accrues to producers as profits also has increased. Finally…the dramatic rise in startups’ proclivity to sell off to incumbents (rather than go public) may have contributed to these trends.
According to Pellegrino, not only have oligopolies increased their profits but also consumers are losing out. He says, “The consumer is losing twice…Less surplus is being produced (as a percentage of the surplus that could be produced), and a smaller share of that goes to the consumer.”
Simply put, most of us are receiving a smaller piece of the economic growth than we arguably should. As far as appearances go, it seems the corporatocracy, especially feared during the Progressive Era, might come true if we don’t do anything about it.
How the Zero Theft Movement Fights Oligopolies
Citizens author theft proposals on our voting platform, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to identify and expose crony capitalism and hold those involved accountable. That way, good people and businesses can properly thrive and enjoy the piece of the piece they’re all due.
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.