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Monopoly and oligopoly - introduction

Concentrated markets, ones where there are only a limited number of suppliers, behave differently to competitive markets. You are required to know about monopoly and oligopoly.

Monopoly

One or occasionally a few firms dominate the market. The others have to accept the market as established by the others. A perfect monopoly is when there is a single supplier. However, a firm gets monopoly powers as its market share edges above 25%. Some industries are natural monopolies, such as water supply and basic power generation.

Oligopoly

Oligopoly is when a few suppliers who provide the same product dominate a market. Petrol companies and the soap and detergent industry are good examples. Each firm has to be concerned about what the others in the industry will do.

Governments are concerned about both of these types of competition. Economic theory suggests that as markets become more concentrated (the number of firms in the industry falls) they become controlled by the suppliers at the expense of the consumer. As we shall see, this is not always the case. They try to regulate, or control these industries.

As was seen earlier, the very size of the firms makes it difficult for others to enter the industry (the size of the firms acts as a barrier to entry). Sunk costs are high so potential losses are high. There is no great encouragement to enter the market however good a product the firm has.

Why do some markets become concentrated and others do not?

The simple answer is growth and economies of scale. Some firms are more efficient than others, and in some industries there are much greater economies of scale than others. This has led to the formation of a number of highly concentrated industries. Examples are the oil and petrochemical industry, the aircraft manufacturing industry, airlines, soft drinks and banking to name just a few. Follow the links below to see how each industry fits the characteristics of monopoly and oligopoly.

Oil and petrochemicals

Aircraft manufacture

Airlines

Soft drinks

Banking

All the above are examples of oligopoly. Examples of monopoly are few and far between. Many natural monopolies, often state owned, have been broken up (privatised) and artificial competition (usually with regulators to control the market) introduced. Examples are electrical power, gas and the telephone service.

More examples - web links

It is worth being aware of recent examples of monopoly and oligopoly and government policy towards them. The best bet is probably to do a search in the Biz/ed In the News archive. You can do this in the window below:

Try searching on terms like:

  • Monopoly
  • Oligopoly
  • Competition

N.B. When you are searching on more than one word, it is best to check the 'match exact phrase' box.