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Monopoly, Oligopoly & Duopoly

23 September 2009 - News - Editor

A monopoly has been defined as a situation where, due to lack of competition or the availability of a substitute product/service, a single enterprise can determine the terms, such as price and availability, under which others can have access to the service or product it is offering. While having a monopoly in the market is not necessarily illegal, there are checks and balances in place to ensure that the monopoly has not been established or maintained under coercive conditions, such as creating a barrier to entry for possible competitors.

Taking its name from the Greek word 'oligo' meaning 'few', an oligopoly is a small number of sellers, referred to as oligopolists, dominating an industry or market. Because of the limited number of participants in an oligopoly, each member is aware of the marketing strategies and actions of the others, with decisions taken by one company either being influenced, or influencing, the decisions of the others. Because of this close interaction, an oligopolist market is considered high risk when it comes to collusion – the setting of prices, limiting of production and division of market share. By its very nature, collusion is anti-competitive and puts companies in danger of running foul of the law in many countries. Sometimes collusion takes place informally, where, for example an acknowledged market leader in an oligopoly independently sets prices according to its own marketing strategy, and then other producers set their prices in response to the market leader. This is also referred to as 'tacit collusion' or 'price leadership', where no formal agreement, or any interaction for that matter, has taken place between rival companies. Oligopolies can be formed within a market sector in one country, or even globally. An example of a worldwide oligopoly is found in what is commonly referred to as the 'Big Four' – Pricewaterhouse Coopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG – companies that dominate the global auditing industry.

A duopoly is a form of oligopoly where a market sector is served by only two suppliers. The most readily recognized example of a duopoly in business is Mastercard and Visa which have the lion’s share of the electronic payment processing business. They have however, passed scrutiny under antitrust laws. Other examples of duopolies in business include credit rating agencies Moody’s and Standard & Poor’s (although together with Fitch Ratings, they are more commonly considered to be an oligopoly); Airbus and Boeing; FedEx and UPS; and Pepsi and Coca-Cola. With the Republican and Democratic parties having dominated the US political scene for around 150 years, the modern American political system is also considered to be a duopoly.

 


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