In economics, an oligopoly is described as a special market structure and a subtype of the model of imperfect competition. It includes a small number of operating undertakings. Although they are institutionally independent of each other, they can act in a coordinated manner without directly colluding with each other. As a rule, undertakings in oligopolistic markets are about the same size (i.e. they have comparable market shares), and none of them has market power individually.
The key difference between an oligopoly and a monopoly is that active competition is possible in the case of an oligopoly. However, such competition is usually qualitative rather than price related. Price competition, as a rule, is not an oligopoly’s feature, because it is not profitable for any of the oligopolists to decrease their prices. If one decreases the price, the other(-s) would also have to do the same in order not to lose volumes. This would in turn result in the overall reduction in prices and profits for all the market participants.
Since undertakings’ market shares are comparable, the oligopolists’ most rational behaviour is to repeat each other’s behaviour. As soon as one starts deviating from the "mainstream" behaviour (e.g. by decreasing prices), the other oligopolist(-s) could apply collective "punishment" measures (in particular, by decreasing prices to even a more significant degree, thus poaching customers). Ultimately, the deviant behaviour benefits none of the oligopolists, which is the reason why they tend to act on each other’s expected behaviour.
But coordination between oligopolists might not be perfect as different undertakings have different cost structures and production and sales efficiency. Besides, non-price (qualitative) competition adds to the difference. Therefore, oligopolists, in addition to qualitative competition, may also try to compete by "hidden" price solutions (e.g. by granting discounts to certain customers or by providing special commercial terms that can be quantified, such as a deferred payment or additional service support). However, such deviations would most likely be relatively insignificant, and the oligopolists’ prices would still differ from the competitive price level.
An oligopoly is not equal to a highly concentrated market (i.e. a market in which several undertakings have significant market shares). For an oligopoly structure to be present, informational transparency is of fundamental importance, that is a relatively free access to information regarding the competitors’ sales volumes and/or prices. In the absence of informational transparency, undertakings will likely not be able to predict each other’s behaviour. Accordingly, there will be no mechanism allowing them to act in a coordinated manner, in which case coordination would only be possible through plain collusion.
In addition, facilitating practices could be used allowing oligopolists to increase informational transparency in the market. These include regular exchange of information (e.g. through customers or trade associations), a price leader model (when an undertaking raises prices and others follow that), and product standardisation. These practices could also be applied in non-oligopolistic markets, but their presence (in addition to a high market concentration) will likely indicate the presence of an oligopoly.
Other parameters indicating market power are also relevant, i.e. absence of product substitutes, significant barriers to entry, absence of large buyers, etc. In fact, these are the same factors that apply to cases where market power belongs to a single undertaking (i.e. individual dominance).
Most economic models of oligopoly applied in practice are based on two basic models: the Bertrand model and the Cournot model. Their fundamental difference is that the Bertrand model shows that companies in an oligopolistic market may lack market power, while market participants have market power in the Cournot model even in the absence of collusion (but it is less significant than in case of a monopoly).
In order to model the undertakings’ behaviour in oligopolistic markets, game theory is also used. It allows predicting possible outcomes of the market participants’ interaction on the assumption of their rationality, primarily regarding pricing strategics.
Finally, products offered by different undertakings may in reality differ significantly both in quality and in terms of consumer preferences, which also affects the undertakings’ market power. Therefore, other economic models could be used to analyse oligopoly (e.g. the Hotelling product differentiation model).
While the concept of an oligopoly is described in economics as a special interaction of the market participants, competition law uses various legal concepts to describe an oligopoly. The notion of oligopolistic interaction could be applied in the context of an abuse of a dominant position, collusion and merger control. An oligopoly could also be identified as part the market analysis outside the context of a specific infringement.
Collective dominance is the closest legal concept to the notion of an oligopoly. It exists in competition law of the EU and a number of other jurisdictions, but it has no direct equivalent in US antitrust law. The criteria of collective dominance essentially match that of the oligopolistic market. This concept is applied both for the purposes of ex-post control (i.e. abuse of a dominant position) and ex-ante control (i.e. merger control). The modern definitions of collective dominance were formulated in the judgements in Compagnie Maritime Belge (for the purposes of the abuse of a dominant position) and Airtours (for the purposes of merger control).
In addition to collective dominance, oligopolistic interaction could be embodied in the concepts describing collusion between competitors. In the case of an oligopoly, explicit collusion is unlikely because undertakings are already able to coordinate their behaviour by virtue of the market structure. Therefore, an oligopoly is typically viewed as tacit collusion. This is what violations in oligopolistic markets are usually considered to be in US antitrust law (see, e.g., United States v. American Airlines 743 F.2d 1114 (5th Cir. 1984)).
Concerted actions (a concept existing in EU competition law but absent in US antitrust law) could hardly be deemed a manifestation of an oligopoly. From the economic point of view, it does not matter how the oligopolists’ parallel behaviour is qualified: as collective dominance or concerted actions. But from the legal point of view, concerted actions cannot take place to the extent the parallelism is explained by rational behaviour. This is the case of an oligopoly, which allows undertakings to act in a coordinated manner by virtue of the market structure. EU competition law drew exactly this divide between an oligopoly and concerted actions in the Woodpulp case.
With respect to merger control, the concept of "coordinated effects" is often used in addition to collective dominance. In EU competition law, these are defined as follows: changing the nature of competition in such a way that firms that previously were not coordinating their behaviour, are now significantly more likely to coordinate and raise prices or otherwise harm effective competition (rf. Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004/C 31/03), para 22).
