Which statement is true about oligopolies?

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When companies within the same industry work together to increase their mutual profits instead of competing doggedly with one another, it is known as an oligopoly situation. Oligopolies are observed throughout the world and even appear to be increasing in certain industries. Unlike a monopoly, where a single corporation dominates a certain market, an oligopoly consists of a select few companies that combined exert significant influence over a market or sector.

While these companies are still technically considered competitors within their particular market, they also tend to cooperate or coordinate with each other to benefit the group as a whole. This anti-competitive behavior can lead to higher prices for consumers.

Key Takeaways

• Oligopolies occur when a small number of firms collude, either explicitly or implicitly, to restrict output or fix prices, in order to achieve above normal market returns.
• Oligopolies can be contrasted with monopolies where only one firm exists as a producer.
• Government policy can discourage or encourage oligopolistic behavior, and firms in mixed economies often seek government blessing for ways to limit competition.
• Examples of oligopolies can be found across major industries like oil and gas, airlines, mass media, automobiles, and telecom.
• The existence of oligopolies does not imply that there is coordination or collusion going on.

What Are Current Examples of Oligopolies?

Understanding Oligopolies

An oligopoly refers to a market structure that consists of a small number of firms, who together have substantial influence over a certain industry or market. While the group holds a great deal of market power, no one company within the group has enough sway to undermine the others or steal market share. As a result, prices in this market are moderate because of the presence of a certain degree of competition.

When one company sets a price, others will respond in fashion to keep their customers buying. For example, if an airline cuts ticket prices, other players typically follow suit. But, because the level of competition is still relatively low compared to a free market with many players, prices are usually higher in an oligopoly than they would be in perfect competition.

Because there is no dominant force in the industry, companies may be tempted to collude with one another rather than compete, which keeps non-established players from entering the market. This cooperation makes them operate as though they were a single company. While not a single-company-dominated monopoly, oligopolies erect significant barriers to entry, effectively keeping out new upstarts from becoming competitors.

The concentration ratio measures the market share of the largest firms in an industry and is used to detect an oligopoly. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.

Companies have the power to fix prices and create product scarcity without competition, which can lead to inferior products and services and higher costs for buyers. While limiting competition, oligopolies and monopolies can operate unencumbered in the U.S. as long as they do not violate antitrust laws. These laws cover unreasonable restraint of trade; plainly harmful acts such as price-fixing, dividing markets, and bid-rigging; as well as mergers and acquisitions (M&A) that substantially lessen competition.

A monopoly is one firm holding concentrated market power, a duopoly consists of two firms, and an oligopoly is two or more firms.

Industries With Potential Oligopolies

Throughout history, there have been oligopolies in many different industries, including steel manufacturing, oil, railroads, tire manufacturing, grocery store chains, and wireless carriers. Other industries with an oligopoly structure are airlines and pharmaceuticals.

Some of the most notable oligopolies in the U.S. are in film and television production, recorded music, wireless carriers, and airlines. Since the 1980s, it has become more common for industries to be dominated by two or three firms. Merger agreements between major players have resulted in industry consolidation.

The common denominators with these industries are that they have strong barriers to entry. They tend to require a lot of initial capital investment (e.g., to make or purchase airplanes or develop and market drugs), and/or they enjoy intellectual property protections such as patents and trademarks that effectively keep out competitors and favor incumbents.

Traders can look to oligopolistic industries to set up potential pairs trades.

Current Examples of Oligopolies

Today, several well-known oligopolies exist. Some of these include well-known or household names in key industries or sectors.

Mass Media

National mass media and news outlets are a prime example of an oligopoly, with the bulk of U.S. media outlets owned by just four corporations:

• AT&T (T)
• Comcast (CMCSA)
• Walt Disney (DIS)
• Charter Communications (CHTR)
  

New players like Amazon and Netflix have joined the mix recently with the rise of streaming media, but smaller players remain shut out.

Big Tech

Operating systems for smartphones and computers provide excellent examples of oligopolies in big tech. Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are overshadowed by Apple and Microsoft Windows. Big tech also is concentrated on the Internet, with Google, Meta (formerly Facebook), and Amazon dominating.

Automakers

Automobile manufacturing is another example of an oligopoly, with the leading auto manufacturers in the United States being Ford (F), GM, and Stellantis (the new iteration of Chrysler through mergers). Worldwide there are perhaps a dozen key automakers including Toyota, Honda, Volkswagen Group, and Renault-Nissan-Mitsubishi.

Telecom

Once an actual monopolistic corporation, AT&T was famously split up due to antitrust ruling into several "Baby Bells." These spinoffs now maintain an oligopoly in the landline and mobile phone provider space, including Verizon (VZ), T-Mobile (TMUS), and AT&T (T).

Entertainment

Hollywood has long been an oligopoly, with a select few movie studios, film distribution companies, and movie theater chains to choose from. The music entertainment industry, too, is dominated by only a handful of players, such as Universal Music Group, Sony, and Warner.

Airlines

The United States airline industry today is arguably an oligopoly. As of 2021, there are four major domestic airlines: American Airlines Inc. (AAL), Delta Air Lines Inc. (DAL), Southwest Airlines (LUV), and United Airlines Holdings Inc. (UAL), which fly just over 65% of all domestic passengers.

Other Industries

The examples above may be among the most obvious, but you are likely to find just a small number of large players across a wide swath of the economy. Food manufacturers, chemical companies, apparel, and supermarket chains are just a few more to look out for.

What Are the Characteristics of an Oligopolistic Industry?

Oligopolies tend to arise in an industry that has a small number of influential players, but none of which can effectively push out the others. These industries tend to be capital-intensive and have several other barriers to entry such as regulation and intellectual property protections.

Which Industries Are Oligopolistic?

Oligopolies exist in several industries from mass media and entertainment to carmakers and airlines to segments of big tech.

What Causes an Oligopoly?

If conditions are right, companies in the oligopoly will come to realize that they are best served individually not by competing tooth-and-nail but by coordinating and cooperating with one another to a certain degree or in particular aspects of business.

Are Coca-Cola, Netflix, or Nike an Oligopoly?

Each of these companies currently enjoys oligopoly membership in their respective industry.

The Bottom Line

Oligopolies exist naturally or can be supported by government forces as a means to better manage an industry. Customers can experience higher prices and inferior products because of oligopolies, but not to the extent they would through a monopoly, as oligopolies still experience competition. The majority of the industries in the U.S. have oligopolies, creating significant barriers to entry for those wishing to enter the marketplace.

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