Oligopoly is a market space where only few sellers or producers exist. Oligopoly mostly happens in those markets where goods are broadly the same and provide similar benefit to consumers.
Since products offered by these producers are broadly the same, if one firm raises price, they would risk losing market share to the other sellers whose prices have remained the same. As a result, a single seller would not be able to raise their prices alone without risking the loss of market share. In order to raise the prices, the sellers would all need to collude and raise their prices to the same level. If firms are able to collude effectively, they can maintain prices higher than perfect competition and obtain larger profits.
To avoid these price wars, sellers rely on other methods of gaining market share. These include advertising, branding, loyalty programs, after-sales service etc.
Oligopoly differs from monopoly and duopoly. Monopoly is a market space where there is only one seller and duopoly is a market space with two sellers. Oligopoly can have multiple sellers, but they are few in number, such that moves of one seller or producer influence others.
Is Oligopoly Good or Bad?
In case of oligopolies, the concerns are that since sellers work in collusion, the barriers to entry for new sellers are very high. This prevents new sellers from entering the market. This could also lead to slower innovation. Also, since the firms decide the price in unison, the consumer becomes a price-taker and might be paying more than desired.
Note that governments might impose antitrust laws to prevent sellers from manipulating the prices too much. However, sellers often find a way around it, to collude without coming under scrutiny.
Examples of Oligopoly
In United States, the automobile manufacturing sector displays characteristics of an Oligopoly. Top car producers include General Motors, Ford Motor Company and Toyota Motor Company. Similarly, news media firms in US is an oligopolistic market, where major market share is held by only top firms like CBS Corporation, Viacom, Walt Disney, NBC Universal, News Corporation and Time Warner.
In India, soft drink beverage market is an example of Oligopoly where only a handful of producers manufacture these beverages. These include CocaCola India, PepsiCo, Dabur, Paper Boat etc. Similarly, the airline industry in India is an oligopoly with limited players, viz., Indigo, Go First, Vistara, Air India, SpiceJet etc.