Oligopoly

An oligopoly is an anticompetitive organization of powerful firms that controls an industry. Oligopolies use their power to stop new competitive firms from entering a market, securing their market share. They also use their power to collectively set prices, which reduces competition among major firms, raises profit margins, and decreases the power of the consumer.

Intentionally engaging in price fixing is illegal in many countries. However, proving that a group of companies is intentionally working to set prices is extremely difficult. In many cases, firms within a market tacitly work together to set prices by following the pricing example of the most powerful firm. This greatly reduces competition within the market, thereby allowing firms to engage in behavior that displeases consumers without significant consequences.

In some areas, openly engaging in price fixing is legal. This leads to powerful organizations called cartels. Cartels work together to set the price of an important commodity. They can sometimes leverage that control into political power.

Background

Capitalism is a type of economy in which private citizens control the industry of a nation, using it for personal profit. It contrasts with other types of economies in which the government owns some or all of a nation's industry. In a capitalistic economy, a government has only loose control. Instead, a capitalist economy is governed by the law of supply and demand.

According to the law of supply and demand, if the supply of a commodity is high while the demand is low, prices will fall. Conversely, if supply is low while demand is high, prices will rise. If the law of supply and demand functions properly, pricing in the economy will regulate itself. The unseen force that drives prices to a fair level in a capitalist economy is called the invisible hand.

Capitalist theorists argue that government regulation will upset this delicate balance. When a government becomes involved in an economy, it stops the natural process of supply and demand from regulating prices. Capitalists argue that such an interruption can lead to unforeseen economic conditions that harm businesses and consumers.

Capitalism relies on competition to function. It assumes that companies with practices that are unfair or displeasing to consumers will collapse when consumers buy from more pleasing competitors. However, numerous tactics can be used to stifle competition. Without rival businesses, the power of the consumer is greatly reduced.

One famous anticompetitive scenario is the monopoly. In a monopoly, a single business controls the vast majority of a market. It is able to use its power and wealth to stop any competitor from becoming a significant threat or to stop new businesses from forming entirely. In a monopolistic economy, consumers have no choice but to purchase goods from the monopoly. For that reason, the monopolistic business can set prices as high as it likes, regardless of supply and demand.

In many countries, monopolies earned through anticompetitive tactics are illegal. Often, the only legal monopoly is one earned by outperforming every competitor in a market. However, such monopolies are rare. Most are formed through anticompetitive tactics such as price discrimination, group contracts, and price fixing. Many capitalist governments make an effort to break up monopolies. For example, they may forbid certain businesses from merging when the merger would eliminate competition in a given market.

Overview

Monopolies are not the only type of anticompetitive business state. Oligopolies are formed when a select few companies control the vast majority of a market. While the presence of multiple powerful firms in an economy means that a monopoly is not present, an oligopoly can still stifle competition. The firms in an oligopoly work together to behave in a similar manner to a monopoly. They realize that any new firms entering the market they dominate would cause an increase in competition, which would force them to lower their prices or offer more services to make themselves more appealing to consumers. With this in mind, the firms cooperate with one another to stop new competitors from taking hold. In some cases, they may lower prices below a profitable margin, taking a temporary loss to drive smaller competitors out of business. In others, they may simply buy the small competitor, absorbing its market share.

Members of an oligopoly realize that new competitors are not the only threat to their profits. Any unnecessary competition among the major firms will cause prices to decrease, thereby reducing profit margins. For this reason, members of an oligopoly often engage in price fixing. They decide upon a set price for a product, often near the highest price that consumers are willing to pay, and collectively decide to stay at or above that price.

Openly agreeing to such a practice is illegal in most countries. It stifles competition, stops supply and demand from functioning, and greatly reduces the power of consumers. However, proving that firms intentionally engaged in price fixing is often extremely difficult, and, at times, international cartels have held the market power of various products, including bulk vitamins, citric acid, and lysine. Additionally, many firms do not need to communicate to engage in oligopolistic price fixing. Instead, several powerful firms follow the example of the most powerful firm in a market. When the most powerful firm raises its prices, the other firms, realizing that they also can profit from higher prices, follow suit. When the most powerful firm lowers its prices, the other firms do the same to maintain the competitive balance. At times,

In areas where such an arrangement is legal, oligopolies can openly band together to set the commodity's price. If the commodity is in high demand, the oligopoly can be extremely powerful. Such oligopolies often are referred to as cartels. One famous cartel, the Organization of the Petroleum Exporting Countries (OPEC), is a multinational cartel that sets the price of oil exported to nations worldwide. Other oligopolies include the airline industry, television production, smartphones, wireless carriers, pharmaceuticals, grocery store chains, tire manufacturing, and major social media platforms.

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