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Oligopoly Oligopoly comes from the Greek word meaning few sellers Big business is an example of oligopoly It is a market dominated by few sellers These are industries like steel automobiles oil and breakfast cereals Because there are few firms each firm must consider how their policies are going to effect their competitors behavior In some oligopolist industries there is a homogeneous product Ex Steel Oil etc In others the product is differentiated across producers Ex Automobiles tobacco Where the products are homogeneous there is greater interdependence among the firms in the industry In these markets a small change in price will send customers to and from the rivals In markets where the products are differentiated producers are not quite as sensitive to each others actions Oligopoly is like a tennis match where each players actions depend on how and where the opponent hits the ball How have oligopolies emerged This type of market structure can often be traced to some form of barrier to entry like economies of scale legal restrictions brand name and brand loyalty or control over an essential resource The same barriers to entry that we defined in monopoly apply to oligopoly economies of scale legal restrictions control of an essential resource Economies of Scale This is perhaps the most significant barrier If the minimum efficient scale in an industry is a fairly large size then only a few firms are needed to produce the output demanded by the market For the auto industry it has been found that the minimum efficient scale for an auto plant is one that can produce 10 of the US auto market High Cost of Entry The high cost of entering the market for new entrants is another aspect of the oligopolist market The cost of building the size plant that is minimum efficient scale is often a huge sum of money It also costs quite of money in advertising and promotion to establish a
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