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Market Structure: Oligopolies - Activity

How far does the theory of oligopoly match with the reality? A case study approach

In studying market structures one of the most commonly used case study examples explore oligopolies; the reason is because they are so predominant in modern business. Oligopolies refer to a market structure where an industry is dominated by a small number of large sellers. It follows that these sellers are also dominant buyers in the industry too - this is termed 'oligopsony'. The aim of this Activity is to investigate some examples of oligopolistic markets and to draw some conclusions about how accurate the theory of oligopoly is in reality. The following are all good examples of industries that have an oligopolistic market structure:

  • Groceries - dominated in the UK by Asda/Wal Mart, Tesco, Sainsbury and Safeway/Morrisons
  • Chemicals/oils - wide definition of the term chemical but key players are Shell, Exxon, GlaxoSmith Klein, ICI, Kodak, Astra-Zeneca, BP, DuPont, BASF and Bayer
  • Brewers - Interbrew, Scottish and Newcastle, Guinness, and Carlsberg Tetley have a four firm concentration ratio of 85%!
  • Fast food outlets - McDonalds, Burger King, KFC
  • Bookstores - Amazon, Barnes & Noble, Borders, Blackwells, Waterstones
  • Detergents - Unilever and Proctor and Gamble
  • Music retailing - HMV, Virgin, Tower, Amazon, MVC
  • Banks - NatWest, Barclays, HSBC, Lloyds TSB
  • Entertainment - Time-Warner, BMG,
  • Electrical retail - Dixons, Currys, Comet
  • Electrical goods - Sony, Hitachi, Panasonic, Canon, Bush, Fuji
  • Mobile phone networks - O2, Vodafone, Orange, T-Mobile
  • Home DIY - B&Q, Focus, Homebase
An independent DIY store - can small DIY retailers compete against the giants?

Image: An independent DIY store - can small DIY stores compete against the giants?

There are of course plenty of others but this gives an idea of the extent to which industries are moving towards oligopolistic structures. It is clear, as well, that many firms are so large that they have significant interests in a variety of markets - each of which may be oligopolistic in nature. Sony, for example, not only manufactures electrical goods of all types but have interests in entertainment with the Sony record label.

Your Task

Choose one of the above markets and research the following aspects:

  • What is the concentration ratio of the industry?
  • Consider the nature of the competition in the industry - is there evidence of kinked demand curves, non-price competition, branding and so on?
  • Is there any evidence of collusion in the industry?
  • Is there a price leader in the market?
  • Is there evidence that abnormal profits exist in the industry?
  • What barriers to entry can you identify in the industry?
  • What evidence of interdependence exists in the industry?

Having collated the information above (some of which will be easier to find than others) present a report of 1000 words on the nature of oligopoly and the extent to which the industry you have chosen reflects the theory of oligopolistic market structures.

Related Web sites for Research:

  • Oligopolywatch - useful independent site with discussions and case studies about the nature of oligopoly (http://www.oligopolywatch.com)
  • Competition Commission guidelines - see page 40 for a discussion on the nature of oligopolies [PDF, 602 KB]. The Competition Commission Web site will lead you to issues relating to a wide variety of industries, for example, the mobile phone industry. (http://www.competition-commission.org.uk/our_role/consultations/past/pdf/ebmarket.pdf)
  • Office of Fair Trading - search the site by putting in 'oligopoly'. Sources have a theoretical explanation of oligopoly with some case studies at the end of the document - see 'Merger appraisal in oligopoly markets'. (http://www.oft.gov.uk)
  • Argos and Littlewoods fined record £22.6m for fixing prices of toys - Guardian story on price fixing in the toy market (http://www.guardian.co.uk/business/story/0,3604,899174,00.html)
  • EU probes vitamins cartel - Guardian story on price fixing in the vitamins industry (section of the chemical industry) (http://www.guardian.co.uk/business/story/0,3604,295228,00.html)
  • OFT: United fixed kit prices - Guardian story on football kits. Need we say more? (http://football.guardian.co.uk/News_Story/0,1563,1010631,00.html)
  • Row over profiteering holds up banks inquiry - Guardian story on abnormal profits in the banking industry (http://www.guardian.co.uk/business/story/0,3604,506029,00.html)
  • Ofgem to investigate rise in wholesale gas prices - Guardian story (http://www.guardian.co.uk/business/story/0,,1085595,00.html)
  • Carling sold to US brewer - BBC news story on the brewing industry (http://news.bbc.co.uk/1/hi/business/1726850.stm)
  • European car market set for shake-up - BBC news story on the motor vehicle sales and repair industry (http://news.bbc.co.uk/1/hi/business/1775384.stm)
  • EU launches oil competition probe - BBC news report on the oil industry (http://news.bbc.co.uk/1/hi/business/the_company_file/366525.stm)
  • Ofgem exposes gas supply problems - BBC news report on the investigation by the industry regulator into gas prices (http://news.bbc.co.uk/1/hi/business/3715642.stm)
  • Hypermarket economy - BBC guide to the key issues in the grocery industry in the UK (http://news.bbc.co.uk/1/hi/special_report/1999/02/99/e-cyclopedia/1270397.stm)
  • EU hurdle to AOL, Time Warner merger - BBC article on the merger of AOL and Time-Warner (http://news.bbc.co.uk/1/hi/business/797558.stm)