OLIGOPOLY

Oligopoly is a type of market structure where a few large suppliers dominate an industry. Oligopolies are neither purely competitive (with many producers) nor monopolistic (with one producer), but fall somewhere in between. In the United States there are plenty of examples of oligopolist industries (in which only a small number of firms dominate). Heading the list are the following industries: automobile, steel, rubber, copper, aluminum, tobacco, and breakfast cereal. Oligopolist industry products may be differentiated, as with cereals, or homogeneous, as with steel.

In some oligopolies one firm tends to be the price leader, such as U.S. Steel Company in the steel industry. In others, all firms may have similar power. It is generally very difficult for a new firm to break into an oligopoly market because of the huge initial investments required. When only a few large firms dominate the market they cannot act independently without causing a change in output, sales, and prices in the industry as a whole. Where only a few large competitive rivals exist, their interdependence is recognized. They strategize to better anticipate each other's decisions. Competition among oligopolies usually does not include price wars (which would damage potential for generating profit). While price fixing is outlawed, oligopolistic firms keep their prices close together and instead compete with advertising and product variation. Advertising is a means to gain a competitive advantage. By making the product's availability better known, demand for the product is increased along with sales. Product variation results in continuous expansion and redefinition of products. Oligopolists are always seeking the best-selling new model. The automobile industry is a classic example.

The United States economy has traditionally consisted of four industry types: purely competitive, oligopolies, monopolistic competitors, and monopolies. Monopolistic competitors compete for essentially the same customers with slightly differing products. Between the four industry types, in 1939 oligopolies contributed a 36 percent share of the national income while purely competitive firms accounted for 52 percent. By 1958 oligopolies still contributed a 35 percent share but by 1980 they accounted for only an 18 percent share of the national income with purely competitive firms accounting for a 76 percent share. The U.S. economy became more competitive over the years due to increased competition from imports, deregulation, and enforcement of antimonopoly laws.