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The Miriam-Webster dictionary defines an oligopoly as a market example in which there are a few producers that have an impact on the market, but none of which dominate the economic scene. However, while this is an accurate description, it doesn’t provide much context for those new to the idea. In the article below, we’ll explore the nature of this type of market scenario and touch upon some of the traits inherent to an oligopolistic economic landscape.
Markets and Sellers
Oligopolies are everywhere in our modern culture. The fact is that many are blind to the influence they exert on the active markets of a number of commodities. But how do these de facto loose partnerships of competitors function? First, it’s important to understand the rudimentary dynamics at play in such an uneasy federation.
Related: What is an Oligopoly?
In a market with only a few, large companies—which may be producers or marketers of finished goods—it’s possible for collusion to play a large part. That means that these few companies form agreements to act in certain ways depending on the actions of consumers and the contextual markets. They can then observe with relative accuracy the immediate actions and the intentions of their competitor confederates. They then act accordingly.
Generally speaking, oligopolies form in order to control the market price of a given good or service. The actors or companies work together to secure the largest possible profit for themselves in any market scenario. They also work cooperatively to strangle the free actions of the market and to direct capitalism in the service of their shared interests. As a result, prices for their commodities are manipulated beyond the ordinary limitations of a direct capitalist market, in which consumers may determine a cap to what they are willing to pay.
Game Theory and Contextual Inflation
The dynamics between sellers in an oligopolistic market are aptly described by Game Theory. This is a body of concepts that has been used to describe individual actors in a group scenario. However, because corporate entities are relatively few, it can be used to predict the actions—hostile and friendly—between allies within the scenario. For example, if one company violates a compact with the others by slashing their prices and securing a larger share of the market, the other companies can take punitive action against the faithless partner.
Why should companies want to cooperate to keep the prices universally high? Simply put, if no better offers exist for a commodity that is deemed essential, then everyone must purchase it from one of the oligopoly members, and those companies all profit with limited resources expended in competition. But there’s a side effect of these artificially high prices. Because no commodity market operates in isolation, the consistently elevated prices of a single product may influence spikes in the prices of other goods or services associated with it. The result is a steady inflation of all goods and services over time. Examples can be seen in the healthcare, education, and automotive sectors.
This gradual inflation is the result of a small number of companies colluding to maximize their profits in various sectors—grocery store chains, sellers of oil and gasoline, cable and internet providers—but it depends upon consumer ignorance. If those in the market were aware of the perfidy entailed by an oligopoly in any area of the market, they could refuse to cooperate, which would introduce a sufficient level of uncertainty into the federation, effectively destabilizing it.
