oligopoly

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Characteristics of Oligopolistic Markets

An oligopoly is a market structure in which a few large firms dominate the industry with each firm having significant market power and the concentration ratio of the top 5 firms is usually high
- E.g. Banks, insurance companies, department stores, supermarkets, petrol retailers, sport stores etc.

Diagram: The Level of Market Power in an Oligopoly

Chart illustrating market structures from perfect competition to monopoly, showing increasing concentration and decreasing competition. — **Firms in an oligopoly market experience a higher degree of market power and the market share is more concentrated**

Characteristics of an Oligopoly Market

High Barriers to Entry & Exit	High Concentration Ratio
Entering the industry is difficult due to the existing dominance of relatively few firm Start-up costs tend to be high e.g. setting up a renewable energy company costs billions Leaving the industry is difficult due to the high level of sunk costs e.g. mobile phone companies are bidding billions on 5G auctions run by the government, and they cannot recoup this money if they leave the industry	A concentration ratio reveals what percentage of the total market share a specific number of firms have A 10-firm concentration ratio reveals the total market share (concentration) of the top 10 firms in the industry A 5-firm concentration reveals the total market share (concentration) of the top 4 firms in the industry The higher the value and the lower the number of firms, the more concentrated the market power in the industry, e.g. the UK supermarket’s 5-firm concentration ratio is constantly around 67%
Interdependence of Firms	Product Differentiation
With relatively few competitors, firms study each other’s behaviour and are highly interdependent in their actions This interdependence generates the use of game theory There is a strong incentive to collude, as this will lead to greater profits There is little incentive to compete on price, as this does not change each firms market share by much and lowers profits	Products tend to be highly differentiated Occasionally, products are similar (e.g. petrol). However, the brand around the product is highly differentiated to the point where consumers perceive it as different and are extremely brand loyal

Concentration Ratios

Concentration ratios reveal what percentage of the total market share a specific number of firms have, e.g the five-firm concentration ratio reveals the market share of the top five firms in the industry
- The most commonly used ones in the UK are the five-firm, ten-firm, and twenty-firm concentration ratios
A five-firm concentration ratio of around 60% is considered to be an oligopoly
A one-firm concentration ratio of 100% would be a pure monopoly
- Many government regulators define a monopoly as a firm with more than 25% market share
  - They act to prevent mergers or acquisitions from taking place, which would give one firm more than 25% of the market share

Worked Example

The following table shows the value of UK supermarket sales for the 3 months to March 31st, 2022.

Calculate the five-firm concentration ratio. Show your working.

Company	Value of Sales (£ million)	Company	Value of Sales (£ million)
Tesco	136.5	Waitrose	24
Morrisons	55	Asda	77.5
The Co-operative	30	Lidl	33
Sainsbury’s	75	Iceland	15
Aldi	44	Others	10

Step 1: Identify the top five firms by value of sales and add the value of their sales together

Tesco (136.5) + Asda (77.5) + Sainsbury’s (75) + Morrisons (55) + Aldi (44)

$equals space 136.5 plus 77.5 plus 75 plus 55 plus 44 equals space £ 388 space million$

Step 2: Calculate the percentage of total sales of the top five firms

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Economics-A-level-Aqa

oligopoly

Characteristics of Oligopolistic Markets

Diagram: The Level of Market Power in an Oligopoly

Concentration Ratios

Worked Example

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