The market is full of big companies and sellers holding huge share in the market.These companies produce large quantities of goods and services with huge customer base. They have economies of scale, therefore, sell products at low prices which makes it difficult for other firms to join the market.One such market structure is oligopoly. This article focuses on the meaning, features and reasons for formation of oligopolies.
Oligopoly is a market structure in which few sellers of the commodity sell homogeneous or differentiated products.There are few sellers having significant share in the market. There is mutual inter-dependence among the sellers regarding the price and other important decisions related to the product. Because of few big sellers making huge market shares it creates a barrier for other firms to enter the market due to fear of competition. Sometimes these sellers form agreements among themselves to attain monopoly is the market.They are known as collusive oligopolies.
Oligopolies are formed in industries where huge capital is required, for eg, industries like shipping , heavy chemicals, petroleum etc.More emphasis is placed on advertisements and promotional activities because sellers sells products which are a little different from each other. The firm produces on large scale and hence achieve economies of scale which lowers the cost of production and creates a barrier for small firms to enter the market creating an oligopoly structure.Many firms forms mergers to escape the market competition thus forming an oligopoly structure.
The most famous example of this form is OPEC Cartel,i.e, Organization of Petroleum Exploring Countries.It was founded in Baghdad in September 1960 by five countries. At present there are 12 nations which are members of OPEC. The main reason for success is the inelastic demand for petroleum.Also OPEC controls a huge part of supply of oil in the world with very low cost of production as compared to others.