Disadvantages of Oligopoly
The media industry is one of the sectors controlled by oligopolies. An oligopoly market structure is characterized by a small group of suppliers or firms controlling all the market activities such as pricing. The market players, in this market structure, set standards amongst themselves to maintain competition as well as control prices. The demand becomes elastic when prices are higher because if one firm raises its price, other companies cannot match it. Conversely, the demand curve is inelastic at lower prices; if one firm lowers its prices, other business can match it. Although there are advantages to oligopoly, this paper discusses the drawbacks of this form of market.
Oligopoly in media provides fewer choices for consumers get a variety content. Users find it hard to choose the best brand in the market. Therefore, consumers have to fewer options to cater for their preferences. In an oligopoly setting, it is hard for small business and startups to penetrate the market. Also, large enterprises usually have full control of the market, whereby smaller enterprises opt not to join this market structure. This market form reduces the motivation of businesses to compete. Firms in oligopoly settle with their ventures because the activities and revenues are guaranteed. Lack of stiff competition reduces the necessity to establish new innovative ideas or product improvements. Customers become used to the products as they are only a few substitutes available. Consumers may also suffer from fixed prices when the market players all agree on a particular price. Oligopoly lacks competitive prices that are good to customers.
Firms in oligopoly practice collusion which is a documented agreement between players to set certain prices or else compete through a cooperative manner. Free market forces do not naturally determine the prices of a good or service due to price-fixing.
Oligopoly deals with differentiated or homogenous products that dominate the market. Therefore, because they have kinked demand curves, the prices of their products or services seem to be inflexible. This price inflexibility is disadvantageous because in uncertain economic conditions the business may make big profits. Entering into oligopoly market requires huge capital investments making it hard for smaller firms to invest. It also takes time for those businesses that have already penetrated to start enjoying economies of scale. Firms in an oligopoly setting find it hard to expand. These firms invest less in Research & Development (R&D) because they face less competition. Therefore, they lack new innovative ideas for product development. As a result, they get a barrier in an expansion.
The oligopoly market structure is usually defined as the huge business market form. These big companies compete by blasting consumers with a lot of TV commercials and sending much junk mail in consumers’ mailboxes. The businesses in oligopoly have to spend high expenses in advertising expenditures because they make business through better promotion campaigns and better products. Moreover, extensive advertising annoys customers because of junk mails and too many commercials everywhere. An oligopoly is characterized by mutual interdependence whereby an action by one firm affects other businesses. Therefore, if a company wants to increase a price, it has to predict how other companies will alter their prices or styling in response. Thus, decision-making in an oligopoly is more complex and time-consuming compared to other market structures. Businesses operating as oligopolistic have to cope with price leadership whereby the dominant company sets the price, and others follow. Therefore, only the price leader or the biggest firms enjoy more profit and economies of scale.
Oligopoly as one of the four market structures has benefits as well as drawbacks. The article has discussed the latter and has indicated how they affect firms in this market structure. Therefore, any new business wanting to join oligopoly market has to weigh the advantages and the disadvantages.