Market Structure: Oligopoly Markets

Do you have a favorite airline? Some people have preferences as to a particular one, but many don't. The experience of getting on an airplane and flying somewhere is very similar with each carrier, and there isn't much choice in the market when choosing who to fly with. The airline industry is a market type known as an __oligopoly__, and there are several defining characteristics of oligopolies to be mindful of. For example, think about the airline industry. Does this market have a single competitor, a few competitors, or many competitors?

Not quite. You could probably name multiple airlines, as well as multiple television channels. There is some competition in oligopolies from a _few_ firms, not just one.

Not really. You couldn't name too many airlines or television networks. There are generally just a _few_ companies competing in an oligopoly.

That's right! You could probably name multiple airlines, as well as multiple television channels, but not too many.

Barriers to entry in an industry are another characteristic of oligopolies. How might you characterize the existence of barriers to entry into airline and television industries?

No, that's not right. It takes a lot of resources to start up an airline

Correct! Imagine the massive undertaking to get a television network or an airline established. These are enormous enterprises, and it would be very costly to enter or exit the market. These represent very high barriers to entry.

Another characteristic of oligopolies you have to consider is pricing power. Would you think that an airline barely scrapes by when it sells you a ticket, or that the airlines have a fairly nice cushion of profit when they set their prices? In other words, do oligopolies possess significant pricing power?

No, they do. Oligopolies have significant pricing power.

They certainly do!

Since there are just a few firms, pricing decisions are based more on what each firm expects its competitors to do. But these dynamics allow oligopolistic firms to set prices high enough to make substantial profits. In fact, what could be better than being one of just a few sellers in a market? Well, being the _only_ seller in the market. This temptation is not often lost on oligopolistic firms. Any attempts to agree on higher prices (price fixing) is called collusion, and a group of firms that collude are known as a "cartel."

To summarize this lesson: [[summary]]

No, imagine what you would have to do in order to start your own airline.

This is the primary characteristic of an oligopoly: a few competitors that dominate the market.

A single competitor

A few competitors

Many competitors

The barriers to entry are large

The barriers to entry are small

There are no barriers to entry

Yes, they must have a lot of pricing power

No, they probably have very little pricing power

No, they likely have no pricing power

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