In economics, a deep understanding of market structures, one of which is oligopoly markets, is very important. This will be the key to making effective business decisions and economic policies.
The market structure includes elements ranging from the number of sellers and type of product to the level of control held by the companies within it. By understanding market structure, economic actors can anticipate market dynamics, evaluate competitiveness, and design appropriate strategies. One market structure that is important to know is the oligopoly market. An oligopoly market is a form of market structure where a small number of large companies control the market.
The main characteristic of this market is that several main players can influence prices and market conditions significantly. On the other hand, the crypto market refers to the market for crypto assets, such as Bitcoin, Ethereum, and others. This market is characterized by decentralization, where transactions occur directly between users without involving a central authority.
So, to understand more about what an oligopoly market means, its characteristics, types, examples, advantages and disadvantages, and the differences between an oligopoly market and a crypto market, see the complete review below!
What is An Oligopoly Market?
An oligopoly market is a market with an imbalance in the number of producers and consumers. Usually, there are fewer producers than consumers. In other words, an oligopoly market occurs when several companies control certain commodities, creating an imbalance in price competition in the market.
In the Big Indonesian Dictionary (KBBI), an oligopoly market is explained as a situation where only a few producers or suppliers of goods can influence prices or create market imbalances because several buyers control them. Meanwhile, citing Investopedia, an oligopoly market is a market structure with a small capacity or a small number of companies that significantly impacts market conditions.
As an illustration, a monopoly market only has one producer, while two companies control a duopoly market. Oligopoly markets, on the other hand, involve two or more companies. Although there is no definite rule regarding the number of firms in an oligopoly market, the number must be low enough so that the actions of one firm significantly influence the others.
Although considered imperfect, an oligopoly market represents intense competition between producers for similar products. Manufacturers in this market compete intensively to maintain the quality of their products and maintain their brand reputation. Because of this, oligopoly markets, although considered unhealthy or imperfect, often create strong competition between producers that can benefit consumers.
Characteristics of Oligopoly Market
Oligopoly markets can be identified by several specific characteristics that differentiate them from other types of markets. The following are several characteristics of an oligopoly market that are important to know, including:
1. There are only a few companies
Oligopoly markets are characterized by domination by a few large companies, often referred to as the “big three” or “big five.” These companies control a large share of the market, and their decisions significantly impact pricing. The level of intercompany interdependence is very strong in this market context.
2. Products can be homogeneous or differentiated
One of the characteristics of an oligopoly market is that the goods traded can be homogeneous (same) or have certain differences. If it is homogeneous, then competition tends to concentrate on the price factor. However, if the product is differentiated, competition involves aspects other than price, such as product quality or features.
3. Prices between goods are almost the same
The next characteristic of an oligopoly market is the similarity of prices between products or services. Product prices in an oligopoly market do not differ significantly and tend to be almost the same. This means that the price of a product or service from one producer is not much different from that of another. This price uniformity is due to the limited number of producers. In general, a price increase by one producer can result in a price increase by other producers.
4. New producers will have difficulty entering the market
The difficulty for new producers to enter oligopoly markets is another characteristic of this market structure. New producers will face significant barriers to entry into oligopoly markets, resulting in difficult market development, limited profits, or even bankruptcy for new producers. Established manufacturers with market reputations and established brands can be a barrier to new competitors. The inability of new producers to enter the market characterizes unhealthy competition. If this continues, oligopoly markets will have difficulty attracting new producers.
5. Requires a mature marketing strategy
A mature marketing strategy is another characteristic of an oligopoly market. In this environment, competition is increasingly tight because the number of producers involved is relatively small, and the number of products or goods produced is also limited. As a result, producers operating in oligopoly markets must design careful marketing strategies to remain competitive with competitors. If producers do not have good strategic planning, they risk losing out on competition, and an inappropriate strategy can result in consumers turning away to other products.
6. Policies from main producers influence other producers
The influence of policies from the main producers is a characteristic of an oligopoly market. Major manufacturers have a significant role in determining policy. In simple terms, if the main producer sets the price of a product, other producers will follow the price set by the main producer. This not only applies to price but also to changes in product function that can affect other manufacturers. In an oligopoly market, other producers must be ready to follow policy changes from the main producer. If you can’t keep up, there is a big risk of being unable to compete with other companies in this market.
Types of Oligopoly Market
After knowing the characteristics of oligopoly markets, now is the time to understand the various oligopoly markets generally found in society’s economic structure. The following are the types of oligopoly markets that you need to know, including:
1. Pure Oligopoly Market
A pure oligopoly market is a market that specifically offers one type of product but with many variations. Even though there is only one type of item, the prices for one item and another are almost identical. In this oligopoly market, market policy is almost entirely influenced by the main producer, which makes this market a pure oligopoly market.
2. Differentiated Oligopoly Market
A differentiated oligopoly market is a market that focuses on one type of product but with price differences between the producers or companies offering it. Simply put, prices from one manufacturer can differ from those of another, creating differentiation. This phenomenon can make oligopoly markets less healthy because consumers choose more affordable prices with adequate quality.
3. Non-Collusion Oligopoly Market
A non-collusive oligopoly market is a type of market where every company that wants to change the price of goods or services needs to pay attention to the conditions and developments that occur in its competitors. Every company takes these steps to grow in this market, while its competitors cannot easily keep up with these price changes.
4. Collusion Oligopoly Market
A collusive oligopoly market is where almost every producer or company cooperates, especially when they want to increase the price of a product or service. This kind of collaboration creates the perception that competition between manufacturers is not too intense, especially regarding price.
Example of An Oligopoly Market
Apart from going through definitions, types, and characteristics to understand the concept of oligopoly, it is also important to recognize several real examples of this market. Here are some examples of oligopoly markets that you need to know, namely:
1. Cigarette Industry
The cigarette industry in Indonesia is a prominent example of an oligopoly market. Even though only one product type is sold, namely cigarettes, cigarette manufacturers compete fiercely in price and quality. Various cigarette brands offer product variants to attract consumers.
2. Aviation Services
The aviation industry can also be identified as an oligopoly market. Each airline has its name and characteristics. Even though there are various options, competition remains fierce, and each airline must maintain its market share to avoid losses or bankruptcy.
3. Buying and Selling Motorbikes
In this modern era, buying and selling motorbikes includes various brands that offer similar products. Even though the product sold is the same, motorbikes, the competition between manufacturers with different brands makes it an example of an oligopoly market.
4. Cement Industry
The cement industry is also included in the oligopoly market. As development increases, demand for cement increases. Manufacturers compete to provide quality cement products at competitive prices.
5. Mobile Phone Market
The widespread use of cell phones in the modern era has made the cellphone industry an example of an oligopoly market. Despite the many brands and price variations, competition remains fierce, and each manufacturer tries to attract consumers with various features and innovations.
6. Telecommunication Operators
Each telecommunications operator has strengths and weaknesses, creating competition in an oligopoly market. Operator manufacturers compete to get consumers with mature marketing strategies.
7. Instant Noodles
Instant noodles, which are popular among those living in boarding houses, are also an example of an oligopoly market. Many instant noodle manufacturers compete to attract consumers with improved quality and product innovation. Consumers have many choices in this market, and manufacturers compete to maintain their market share.
Advantages and Disadvantages of Oligopoly Market
Like other types of market structures, oligopoly markets have advantages and disadvantages. However, these advantages and disadvantages can vary and depend on market dynamics and how oligopoly companies carry out their business strategies. Here are some advantages and disadvantages that you need to know, including:
1. Advantages
- Control over Price: Oligopoly markets allow sellers to control prices within certain limits. Domination by a few large companies allows for price negotiations that benefit consumers in a price war situation.
- Innovation and Quality: Competition in an oligopoly market encourages companies to compete in innovation and product quality. This results in better and more innovative products, benefiting consumers who gain access to the latest products.
- Efficiency: Competition for market share drives efficiency in production processes and reduces costs. Companies strive to improve their operational efficiency to remain competitive and win the hearts of consumers.
2. Disadvantages
- High Barriers to Entry: Oligopoly markets have high barriers to entry. Large investments are required to enter this market, making it difficult for new companies to compete with established players.
- Price Wars: Price wars often occur when new companies try to enter the market or when a price drop may result in losses. This price war can harm all players in the market and result in instability.
- Cooperation and Cartels: Several firms in an oligopoly market may try to cooperate or form a cartel. While this can be profitable for the companies involved, it can harm consumers and fair competition. Cartels can result in unfair pricing practices and stifle innovation in the market.
What is the Difference Between an Oligopoly Market and a Crypto Market?
After discussing the types, characteristics, and examples, it is also important to know the differences between oligopoly and crypto markets. The following are several differences between the oligopoly market and the crypto market, including:
1. Market Structure
Oligopoly markets are dominated by several large companies that control most of the market share. Competition exists between these companies, and one company’s decisions can significantly impact the market. Meanwhile, the crypto market is decentralized, where transactions occur directly between users without involving a central authority. Please note there is no single entity that controls this market.
2. Competition
In an oligopoly market, competition tends to be tight between several large companies that dominate the market. Companies compete to gain market share even though there is often some agreement or coordination between them. Competition in the crypto market is more open and less centralized. Many crypto assets with varying characteristics compete in the market, and no single entity controls all transactions.
3. Regulation
In general, oligopoly markets are regulated by government agencies to prevent unfair business practices and maintain competitive balance. On the other hand, crypto market regulations are currently not uniform worldwide. Some countries have strict regulatory frameworks, while others are more open to innovation in the crypto space.
4. Nature of Assets
Oligopoly markets usually involve real assets or conventional services managed by large companies. Meanwhile, the crypto market involves decentralized digital assets that do not depend on a central entity, such as Bitcoin, Ethereum, and others.
5. Volatility
In oligopoly markets, price volatility tends to be more controlled because a number of large companies have greater control over the market. On the other hand, the crypto market tends to have a high level of volatility because many factors, including market speculation, mass adoption, and external news, influence it.
Conclusion
In conclusion, oligopoly and crypto markets are very different economic models. Oligopoly markets feature the dominance of a few large companies with more controlled competition. In contrast, crypto markets involve decentralized digital assets with more open competition and high volatility.
Furthermore, it is important to remember that understanding market structure plays a key role in the economic context. Knowledge of how the market operates, whether oligopoly or crypto, will provide a strong basis for making the right decisions. In dealing with market diversity, understanding market structure is key to responding to change and optimizing opportunities in various economic contexts.
So, now you understand what an oligopoly market means, its characteristics, types, examples, advantages and disadvantages, and the differences between an oligopoly market and a crypto market. Furthermore, you can also read other interesting articles, such as capital markets and types of markets on INDODAX Academy.
Please remember that INDODAX Academy presents various very useful articles for those interested in better understanding the realm of blockchain and crypto assets. By understanding the basics of crypto assets, you will later be able to develop the skills needed to start investing in crypto through the official and trusted crypto asset buying and selling platform, INDODAX.
Come on, continue to deepen your knowledge about blockchain technology and the world of crypto assets through articles at INDODAX Academy!
