Types of oligopoly


Oligopoly types are the different ways a small group of firms controlling price and output can operate in a specific market.

As we already know, an oligopoly is a small group of companies that have control of the production and price of a certain product. Because there are few companies that compete, the companies maintain a relationship of interdependence between them.

This implies that, if one of these companies decides to lower or raise its prices or generate an increase or decrease in its production, these decisions will affect the others. For that reason companies in these markets are trying to investigate and guess the actions that each company can take.

Types of oligopoly

Oligopolies can be classified into the following classes:

  • Natural oligopoly: It is the oligopoly that occurs when few companies can compete in the market, due to certain natural conditions such as taking advantage of the economy of scale or the demand they face. This situation can cause them to behave as barriers that do not allow the access of more competitors.

The advantages obtained over its competitors are produced by maximizing its production processes due to the use of its facilities, machinery and equipment, buildings, capital goods; and its physical infrastructure in general.

  • Legal oligopoly: It occurs when entry barriers are placed by protections granted by the state or the government. These barriers can be grants, subsidies, privileges, concessions or any type of help to avoid the entry of competitors to the market.

The most used are dumping, subsidies, concessions and any market regulation.

  • Differentiated oligopoly: The differentiated oligopoly occurs when the companies that compete in that industry produce differentiated products, which behave as substitutes for each other. But they are not perfect substitutes.

The products sold in this type of oligopoly could become similar, but certain differences in added value could be the cause of the consumer's choice of purchase.

Therefore, the consumer can choose the one that offers the best price, performance, functionality and overall quality.

The differentiation could also be due to investments in advertising, research and development, which allows generating additional value for the users of these products.

  • Concentrated oligopoly: It occurs when this small group of companies produce the same or identical goods, they could be raw materials or industrial products.

To illustrate these cases we can mention products such as cement, oil and steel, among others. If we realize these products are difficult to differentiate and have almost the same characteristics.

In this type of oligopoly, as there are very few companies that produce these products, the decision of the production volumes and price of each one has a direct impact on the others.

  • Cartel or collusion: Arises when the producers of these markets agree to set prices and the level of production of the total market.

The agreements establish them so that all the members of the pact have benefits, but to the detriment or detriment of the consumer.

The most illustrative example of this case we have with OPEC (Organization of Petroleum Exporting Countries), which is made up of fourteen of the largest oil producers in the world.

The idea of ​​reducing the supply is to keep the price higher than it actually would be in a competitive situation.

Graphic example of a collusion

Usually when a collusion is made, some companies tend to cheat, because they lose profits, then they do not respect neither the agreed price nor the established amount. If they cheat, they sell at a lower price and produce more than the established quota.

To better understand it, we are going to base ourselves on the following graphs, the terms that we will use will be:

P = price

CTP = average total cost

Q = quantity

D = demand

The first case is that of a company that complies with the established, in the graph we see that the price in red is the competitive market price and would be 100 and the agreement establishes that it will be sold at a price higher than 125, while the The established quantity will be 20,000 units.

In this case, the company has an economic loss that is reflected in the red rectangle.

The second example is the case of a company that cheats. First, we observe that it produces 10,000 more units than the established quantity and the price it charges is less than the agreed price; This situation allows you greater profits, that reflects you in the profit that will be the one shown in the red rectangle.

We will use the last graphic case to visualize how production is generated when one company complies and the other cheats.

In this same case of the company that cheats, we realize that it does not respect the agreed amount of production and produces more to achieve its objective, the only different thing in this graph is that it does not have an average total cost line, but the red line that it reflects market demand, which is a negative slope.

In the graph we see that the company that complies produces the 20,000 established units, but the company that does not comply produces 30,000 units.

In summary, we can realize that the natural and differentiated oligopolies are, despite the little participation of producer companies, market competition structures, where the consumer can obtain benefits, in the acquisition of their products.

But in the case of legal oligopolies and collusive concentrates, the consumer is seriously affected. If it is the legal oligopoly, the government protects companies from real or potential competition, which keeps them in a good position in the market, even if they are not the most efficient and competitive.

And the worst case scenario would be collusion, because in the agreements established between the members, only the producers benefit at the expense of the detriment suffered by the consumer.


Tags:  derivatives bag economic-analysis 

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