Characteristics of Oligopoly Markets

Oligopoly is present when a handful of competitors dominate the market for a good or service and each firm makes pricing and marketing decisions in light of the expected response by rivals. Individual firms have the ability to set pricing and production strategy, and they enjoy the potential for economic profits in both the short run and the long run. Oligopoly describes markets that can be characterized as follows:

• Few sellers. A handful of firms produces the bulk of industry output.

• Homogeneous or unique product. Oligopoly output can be homogeneous (e.g., aluminum) or distinctive (e.g., ready-to-eat cereal).

• Blockaded entry and exit. Firms are heavily restricted from entering or leaving the industry.

• Imperfect dissemination of information. Cost, price, and product quality information is withheld from uninformed buyers.

In the United States, aluminum, cigarettes, electrical equipment, filmed entertainment production and distribution, glass, long-distance telecommunications, and ready-to-eat cereals are all produced and sold under conditions of oligopoly. In each of these industries, a small number of firms produces a dominant percentage of all industry output. In the ready-to-eat breakfast cereal industry, for example, Kellogg, Kraft (Post cereals), General Mills, Nabisco, and Quaker Oats are responsible for almost all domestic production in the United States. Durable customer loyalty gives rise to fat profit margins and rates of return on assets that are two to three times food industry norms. Corn Flakes, Sugar Frosted Flakes, Cheerios, Raisin

Bran, Wheaties, and a handful of other brands continue to dominate the industry year after year and make successful entry extremely difficult. Even multinational food giant Nestlé sought and obtained a joint venture agreement with General Mills rather than enter the potentially lucrative European breakfast cereal market by itself. Long-distance telephone service is also highly concentrated, with AT&T, Sprint, and WorldCom providing almost all domestic wire-line service to residential customers.

Oligopoly also is present in a number of local markets. In many retail markets for gasoline and food, for example, only a few service stations and grocery stores compete within a small geographic area. Drycleaning services are also sometimes provided by a relative handful of firms in small to medium-size cities and towns.

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