Oligopoly Is a Market Structure Characterized by

Oligopoly is a market structure characterized by a small number of relatively large firms that dominate an industry (Oligopoly, 2000). It can contain 2 to 20 firms that dominate it. As the number of firms increase, it becomes monopolistic competition where dominance is controlled by one firm. An oligopolistic firm is relatively large compared to the overall market, has a substantial degree of market control, and has significantly greater capital than a monopolistically competitive firm.

Key features of an oligopolistic firm include relative size and extent of market control of interdependence among industry firms, the actions of one firm depends on and influences actions among others, and it tends to be a prime source of innovation that promotes technological advances and economic growth.

The three major characteristics are a small number of large firms, identical or differentiated products, and barriers to entry where the market is controlled through barriers to entry, such as patents, resource ownership, government franchises, startup costs, brand name recognition, and decreasing average costs. Oligopolistic firms tend to be diverse and, at the same time, exhibit interdependence, rigid prices, nonprice competition, mergers, and collusion, where two or more firms secretly control prices, production, and other market aspects.

A concentration ratio indicates the relative size of firms in relation to the particular industry as a whole (Concentration Ratio). Low concentration ratios indicate high levels of competition in the industry. High concentration ratios indicate low and medium levels of competition in the industry. When concentration ratios are nearing 100%, they show evidence of a true monopoly. According to (Guitierrez, 2006), fluid milk (311511) has a four firm concentration ratio of 42.6%, total competition of 315 firms, and a 50 firm concentration of 83.7%. This shows a medium level of competition in the fluid milk industry.

Women's and girl's cut and sew dresses (315233) has a four firm concentration ratio of 21.6%, total competition of 525 firms, and a 50 firm ratio of 69.6%. This shows a high degree of competition within the industry. Envelopes (322232) have a 51.1% four firm concentration ratio, 166 total firms in competition, with a 50 firm concentration ratio of 91.8%. This shows a low level of competition in the industry. Electronic computers (334111) have an 80.6% four firm concentration ratio, with 465 competing firms, and a 50 firm concentration ratio of 99%. This shows a low level of competition within the industry.

Fluid milk, envelopes, and electronic computers are all oligopolistic industries. The four firm concentration ratios in each industry indicate a few large firms control the industry markets with identical or differentiated products. Each industry shows a high degree of barriers to entry by patents, resource ownership, brand name recognition, etc. Elmhurst Dairy, Inc., Southeast Milk, Inc., Prairie Farms Dairy, Inc., and Oberweis Dairy all control the fluid milk market (United States Fluid Milk Manufacturers, 2012).

The envelope industry is controlled by Priority Envelope, LA Envelope, Inc., Quality Envelope, and Western States Envelope & Label. The electronic computers industry is controlled by Dell, Inc., International Business Machines (IBM), Hewlett-Packard, and Oracle Corporation. Oligopolies have good and bad characteristics. They tend to be inefficient in allocation of resources and promote concentration, inequality in wealth and income, which can exert influence over the economy, politics, and society. Oligopoly firms can also develop new product innovations and take advantage of economies of scale that reduce production costs and prices.

The market object with oligopolies is to maximize the good and minimize the bad in any given market. The fluid milk market is a good example of a good oligopoly. With 42.6% of the total market share, Elmhurst Dairy, Inc., Southwest Milk, Inc., Prairie Farms Dairy, Inc., and Oberweis Dairy are in good position for new innovation that will drive competition and the economy. With new innovations and competition, the industry can grow with other competitors having the ability to compete.

Although there is competition between the four firms, the industry still has room for additional competitors with a small degree of barriers to entry. Prices still remain competitive among other competitors instead of just the four firms. The electronic computer industry is a bad oligopoly example, as the four firms, Dell, Inc., IBM, Hewlett-Packard, and Oracle, Inc. control 80.6% of the total market for the industry. The majority of the competition and.