Oligopoly and Innovation an Oligopoly

Oligopoly and Innovation

An oligopoly market is one in which there are a few large firms with the resources and technology to have a big control over the entire market. The market share is divided among these few firms, but no firm is in a position to dominate the entire market. This is in stark contrast to a monopolistic firm. In a monopolistic market, there is only one firm that dominates the entire market and so they get to choose the price as well as the service. In such an environment, there is little need for the firm to innovate or find ways and means to attract more customers.

A firm operating in an oligopolistic market has lots of incentives to innovate and some of them are mentioned below:

Competition

One of the primary reasons to innovate is to stay ahead of competition. When there are only a handful of firms, each firm knows the operations of the other in and out. The marketing strategies, product lines and the operations of one company is known to the other and the only way for a company to stay ahead of its competition is to innovate. Innovation can come in any aspect of the company ranging from product lines to marketing techniques and this competition becomes a big incentive to innovate.

Market share

A firm operating in an oligopolistic market may be not be able to dominate the market like monopolistic firms because they are larger in number and the entire market share is divided among the different firms in the market. So, there is a constant need to maintain and increase the market share and this is another reason to innovate. Firms that are able to come up with better products or a higher quality of customer service are likely to attract more customers and this is a sure way to maintain and increase the existing market share.

Survival

In tough economic times, the very survival of a company may depend on its innovative abilities. Though this is applicable to firms that operate in all forms of market, it is more feasible in the case of an oligopolistic firm because they have the resources and expertise required for innovation.

Common good

One of the important characteristic of oligopoly is the interdependence of one firm on the others. When faced with touch economic problems or government regulations, the only way for the industry to survive is by innovation. When one firm innovates, it benefits the other firms in the industry in a big way and this can lead to co-operations and mergers. In most cases, consumers benefit a lot from innovation in terms of the products and services they enjoy and this is likely to bring more business and profits to the industry as a whole. This is why other firms may be willing to lend resources to benefit the common good. When one company innovates, it benefits the industry as a whole and this can act as a booster to the other firms as well. An example is the five banks that rule the UK banking industry. When they were faced with a financial crisis, the banks were forced to innovate and come up with better products. This is yet another reason why oligopolistic firms are more likely to innovate than firms operating in any other form of market.

Resources

A firm operating in an oligopoly market has all the resources and technology it needs to innovate. A good case in point is the U.S. cellular industry that is dominated by AT&T, Verizon, Sprint, U.S. Cellular and T-Mobile. They had the resources to look for higher speeds for customers and the end result of this innovation is the 4G speeds for internet access. These vast amount of resources give these firms the confidence to spend money on innovation.