The three most important characteristics of oligopoly are: (1) an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry.
These three characteristics underlie common oligopolistic behavior, including interdependent actions and decision making, the inclination to keep prices rigid, the pursuit of nonprice competition rather than price competition, the tendency for firms to merge, and the incentive to form collusive arrangements.
Small Number of Large Firms
The most important characteristic of oligopoly is an industry dominated by a small number ...view middle of the document...
This characteristic might seem to be a bit wishy-washy, taking both sides of product differentiation issue. In actuality it points out that oligopolistic industries general come in two varieties.
Identical Product Oligopoly: This type of oligopoly tends to process raw materials or produce intermediate goods that are used as inputs by other industries. Notable examples are petroleum, steel, and aluminum.
Differentiate Product Oligopoly: This type of oligopoly tends to focus on goods sold for personal consumption. The key is that people have different wants and needs and thus enjoy variety. A few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers.
Barriers to Entry
Firms in an oligopolistic industry attain and retain market control through barriers to entry. The most noted entry barriers are: (1) exclusive resource ownership, (2) patents and copyrights, (3) other government restrictions, and (4) high start-up cost.
Barriers to entry are the key characteristic that separates oligopoly from monopolistic competition on the continuum of market structures. With few if any barriers to entry, firms can enter a monopolistically competitive industry when existing firms receive economic profit. This diminishes the market control of any...