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Like perfect competition, monopoly is a quite rare situation, restricted to a relatively small proportion of the output of the economy. Of much greater importance and interest is the last of our four types of market structures – oligopoly, which accounts for an estimated 40 to 50 percent of the economy’s output. The figure shows the four types of market structure ranked according to competitiveness, and indicates roughly the relative size and importance of each.

Oligopoly refers to a situation in which a few sellers (or producers) dominate a market (or industry). More specifically, an industry is called “oligopolistic” if four (or fewer) producers account for 50 percent of more of the industry’s sales.

Behind this somewhat technical definition lie certain economic realities that are important to understand. When only a few firms dominate an industry, there exists the possibility that they will band together so as to increase their prices and profits. For such oligopolistic power to exist, it is not necessary that the industry consist of only four or fewer firms. As long as the dominant four firms account for half the industry’s sales, the rest of the sales could be split up among, say, twenty or thirty small firms. In these circumstances, the smaller firms would very likely follow the price set by the dominant firms, making the industry oligopolistic despite the presence of considerably more than four firms. Similarly, there could be hundreds of firms in an industry across Canada, but if they are fragmented into relatively small local markets with a few firms in each market, these markets will be oligopolistic. For instance, there are probably hundreds of road paving firms in Canada, but all do not serve a national market: if a municipality offers a contract for road paving, bids may be received from only four or five local firms, a situation than certainly looks oligopolistic. Thus, in deciding whether an industry is oligopolistic, the total number of producers is less important than the number that the buyer actually has to choose from.

This is the key point about oligopoly: unlike the competitive situations we looked at earlier, the buyer’s choice among sellers or producers is limited to a relatively small number. This, in turn, increases the potential market power of the producers – it increases their ability to raise prices. This is why oligopoly is placed next to monopoly.

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