An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for "few sellers". Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by ologopolists always involves taking into account the likely responses of the other market participants.
Oligopsony is a market form in which a firm faces a small number of sellers of the inputs it needs to purchase. When an industry comprised of a few firms is viewed by those within the industry, it is referred to as oligopoly : when viewed by outsiders that wish to purchase the industry's products, it is referred to as oligopsony. Oligopoly refers to the market for output (ie.: product market) while oligopsony refers to the market for inputs (ie.: factor markets). A market with a few sellers (oligopoly) and a few buyers (oligopsony) is referred to as a bilateral ologopoly.
The terms monopoly (one seller), monopsony (one buyer), and bilateral monopoly have a similar relationship.
In industrialized countries oligopolies are found in many sectors of the economy, such as cars, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation has resulted in the emergence of oligopsony in many market sectors. For example, the aerospace industry. There are now only a small number of manufacturers of civil passenger aircraft. A further instance arises in a heavily regulated market such as wireless comminucations. Typically the state will license only two or three providers of cellular phone services.
Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition.
A market with only two sellers is also known as a Duopoly.
A number of theories have attempted to explain the behaviour of oligopolies:
- Stackelberg's duopoly
- Cournot's duopoly
- Sweezy's oligopoly
- Betrand's oligopoly
- Contestable markets by Baumol
- Various theories based on game theory, such as kinked demand