When a market It is dominated by a small number of supplying producers (the oligopolists ), it is said that there is a oligopoly . The word has Greek origin and is formed by two concepts: oligo ("few" ) and polio ("seller" ). Therefore, oligopoly means justly “Few sellers” .
Since there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of an entrepreneur, in this way, affect the decisions of the rest. The oligopolists take advantage of their privileged position To generate higher prices and less production. This type of companies collaborate with each other , in order to maintain said power and avoid competition.
When it comes to talking fully about what an oligopoly is, it is essential that we know the main signs of identity or characteristics that define it. Thus, it should be stressed that it has two types of goods produced: the differentiated ones, which are the processed products, and the homogeneous, the raw materials.
In the same way an oligopoly is identified by the fact that in its environment the competition does not exist as such since in it it operates a limited number of companies that are those that have absolute control and control of it.
The third sign of identity that characterizes a business “organization” of this type is the fact that it often goes to its own resources in terms of advertising and marketing.
And finally the fourth property that we find in it is the very usual use that is used of what is known as dumping. This is what is directly in lowering prices even below production costs, to obtain benefits since, as we have mentioned above, there is no competition.
However, it is also important to underline that a sign of identity that oligopolies have and that is precisely not in their favor is the fact that they hinder and prevent the entry of new companies to it.
Among the sectors where it is more frequent to talk about oligopolies is that of oil or electricity.
The operation of an oligopoly can be explained by methods of Games theory . Before the cost functions Of the companies involved, each one will offer its products at a certain price and with a specific quantity. Buyers will determine the amount actually demanded for each company and will give producers a certain level of benefits .
Producers can also try differentiate its products with respect to those of the other companies, so that consumers choose them.
Game Theory refers to the decisions of each producer in turn depend on the decisions of the competition. This is usually represented by a reaction curve . If the hypothetical situation arose that the reaction curves of all companies crossed at a certain point, that set of decisions would imply the game balance .