Different forms of market emerge because the number of suppliers and buyers varies. One of these types of market is the supply oligopoly. It is a form of oligopoly in which a few suppliers face a large number of equal buyers. This market situation is convenient for the providers. The competition is manageable. In addition, there are plenty of inquirers or customers. Therefore it is not necessary to introduce competitive prices. Instead, moderate pricing is possible.
Oligopoly, Polypol & Monopoly in comparison
In this lesson you will learn about the supply oligopoly. You will learn how the supply oligopoly differs from other oligopolies and how pricing works. We also go into the advantages and disadvantages of supply oligopolies. You can use the practice questions at the end of the lesson to check your level of knowledge.
English: supply oligopoly
Why are supply oligopolies important?
The fact that moderate pricing is possible in a supply oligopoly due to the small number of providers and the large number of customers is only true in theory. In practice, it has been shown that a reduction in the price of one provider means that the other providers follow suit in a timely manner. The small number of providers relaxes the competitive situation. Conversely, however, it is easier for the customer to compare prices given the few providers. In this respect, the supply oligopoly affects several corporate divisions.
The supply oligopoly within the oligopolies
According to phonecations.com, oligopolies can be divided into three types:
- Supply oligopoly
- Demand oligopoly
- Bilateral oligopoly
Supply oligopolies are characterized by the fact that many buyers face few suppliers.
Few mineral oil companies share the fuel market in Germany.
Conversely, in the demand oligopoly, there are few buyers versus many suppliers.
There are around 40 guest houses and hotels in a tourist area, which are only listed by two travel providers in the program.
In a double-digit oligopoly, both buyers and suppliers are represented in small numbers.
There are few manufacturers of special machines, and the demand is also low.
What is a supply oligopoly?
In theory, there is a supply oligopoly when there are many buyers and few suppliers. Apparently this market situation is comfortable for the providers – customers are plentiful and the competition is manageable, so the pricing is moderate.
In practice, however, it has been shown that if one provider reduces the price, all other providers (have to) follow suit. The reason is that the manageable providers make it easier for customers to compare prices with one another.
Theory and practice clearly document that the situation of suppliers and customers is intertwined. The advantages of the provider – many customers and a manageable competitive situation – can quickly turn into a disadvantage. Because the customer also has advantages, namely an easily controllable number of providers. This means that ultimately the customer is in charge.
Examples of supply oligopolies
Without fuel, it is not possible to drive a car or motorcycle, although electricity and natural gas, among other things, replace the fuel. These energy sources have one thing in common: there are only a few suppliers, but demand is continuously high. Nevertheless, providers of fuel, electricity and gas cannot drive the price up at will. Because there are other providers who can undercut the price at any time in order to increase their sales and profits.
The same goes for medication. Here, too, the number of providers is limited to a few. But there are a large number of people who have a need for medication. This, too, is a classic example of a supply oligopoly, just like Internet providers or the mobile communications market. There are only a few internet providers as well as large network operators who face an enormous number of internet and mobile phone customers.
Another example are car manufacturers, where there are also few providers and high demand.
Properties and characteristics of supply oligopolies
The main characteristics of supply oligopolies:
- Few providers face a large number of customers.
- The circle of providers is manageable. That is why the individual providers have large market shares.
- Two scenarios are possible: Intense competition can arise between the providers or there is only little competitive pressure on the providers.
- Often there are price agreements between the providers, which are, however, prohibited by law.
- It can also happen that the largest provider sets the prices so that the other providers (have to) follow suit.
Disadvantages of a supply oligopoly
The greatest advantage of a supply oligopoly – the manageability of the competition – is also its greatest disadvantage.
The consequences of the manageability of the competition:
- The individual providers can only grow with difficulty due to the rigid framework conditions.
- The prices cannot be increased without further ado, since the customers can easily see the prices due to the manageability of the providers.
How the situation develops within a supply oligopoly depends on the individual providers, so that there can also be price wars and competitive behavior.
Price formation in the supply oligopoly
In order to understand the price formation in the supply oligopoly, it is important to know how the price of a commodity is formed.
The pricing in the ideal case
As a rule, price formation on the market takes place under the influence of demand and supply. Conversely, the price has an influence on the volume of demand and supply. When the supply is large and the demand is low, the price falls, while when the demand is large and the supply is low, the price rises.
A market always arises when supply and demand meet. This applies to the weekly market and the flea market as well as to the many virtual marketplaces on the Internet where buyers and suppliers meet.
The pricing shown here is the ideal case that does not correspond to reality and therefore serves as a model for price development. This so-called perfect market only arises under certain conditions.
This includes many suppliers and buyers, homogeneous goods, no personal, factual or spatial preferences, complete market transparency and a temporal correspondence of supply and demand. This results in an equilibrium price or market price.
The pricing in the oligopoly
In an oligopoly, a provider must expect his price campaigns to trigger reactions from the other few providers. Here the oligopolist is the price fixer, although his price margin is limited. In contrast, in a monopoly, for example, the provider is unrivaled, so that he can operate an independent pricing policy. The monopoly is the price fixer. This means that its sales are closely linked to the structure of demand.
A special feature of the oligopoly is the reaction loyalty of the few different providers who enjoy high market power. That means they can have a huge impact on the market in terms of quantities and prices. It is true that you have the power to largely determine the prices for the products yourself. Nevertheless, the situation can change suddenly if one of the providers pulls out. So oligopolists have less to do with customer reactions than with competitors.
Differences between demand and supply oligopoly
Market forms: Demand oligopoly & supply oligopoly
In contrast to the supply oligopoly, in which few suppliers face a large number of buyers, with a demand oligopoly the number of buyers is also low. In both the demand and supply oligopoly, oligopolists can coordinate their behavior in the market with one another.
Among other things, you can prevent cut-throat competition by fixing prices. However, such agreements violate the statutory prohibition of cartels with regard to restraints of competition.