Both monopoly and oligopoly refer to a specific type of economic market structure, but understanding the differences and implications of the two can be difficult. This article will explain the key differences to understand a monopoly vs. an oligopoly.
A monopoly refers to an economic market for a specific product or service where there is only a single provider of that service. This means that the single provider, be it a government entity or a corporation, can dictate prices and other factors and that the end consumers for the most part need to accept it. In many countries, monopolies are frowned upon and governments actively oppose them, and in extreme cases like Standard Oil, they have forced the companies to break into smaller entities. The reason for this is that government and the public, in general, want to avoid situations where a company can dictate terms to people and charge far more than is justified for their product because there are no alternatives.
Very few industries have a monopoly in place though in recent years both Microsoft and Google have been plagued by government inquiries and actions directed at their near-monopolies in their respective industries. In a way, this is a result of too much success, as they both rose to the top and defeated their competition to end up being the market leader by an unsurmountable margin.
An oligopoly refers to an economic market where there are a small number of players, be they government or corporations, which dominate the industry. While in some industries this is sufficient to still keep a competitive environment, where each is seeking to beat the others, there is a risk that the limited number of players will collude.
Historically a prime example of an oligopoly has been the Organization of the Petroleum Exporting Countries (OPEC) where a limited number of countries have dictated oil production and prices to the global economy. This has changed significantly over time as more and more countries become oil producers, but OPEC still has a major role in the global economy. OPEC’s oil embargo of 1973 was a key example of what can happen when producers collude on pricing, where oil prices globally increased over 300% in a few short months.
Many governments limit the creation of oligopoly condition markets by putting major mergers under review. The oil industry and the telecom industry in America have both seen large mergers reviewed to ensure that the industry does not become so closely held that consumers suffer.
Both of these market structures are generally going to result in a negative position for consumers, as the consumers will be at the whim of a single company or a limited group of companies. One of the key risks with a monopoly or oligopoly structure occurring is that it can then become nearly impossible for a new competitor to enter the market. Either they could never compete on the same scale, or the monopoly company could afford to sell at a loss or no profit until the new entrant folds.