An oligopoly is a market structure in which a small number of companies have a majority of market share. An oligopoly is like a monopoly, just with more than one entity dominating that segment of the market. Oligopolies are not illegal but they can sway the market and investors are wise to recognize an oligopoly and its members and be on the lookout for anti-competitive behavior.
A prime example of an oligopoly would be the airline industry in the U.S. By controlling routes and other aspects of the business, a small number of airlines can keep out the competition, control prices and pretty much keep the market to themselves.
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Lack Of Competition
Where oligopolies exist, there is a decided lack of competition. The means participants can set prices and, as a result, increase profit margins above what a truly free market would allow. Does this mean that for investors oligopolies are good? After all, increased profit margins mean more profits and higher stock prices – right?
The problem is that the free market is not in control. Members of the cartel are. More importantly, cartel members can work together to squeeze out competitors by undercutting them. Once the competitor is out of business the members of the oligopoly can revert to their old ways.
Monopoly Versus Oligopoly
Consumers, investors, regulators and businesses themselves frequently mistake an oligopoly for a monopoly. The problem is that when one company is blamed and targeted and, in fact, several companies are working in concert to destroy competition, the practice can continue while everyone, including regulators concentrate on only one entity. It’s kind of like going after one bank robber while the rest of the gang continues to rob banks.
An additional problem is that we tend to treat monopolies as bad and illegal while failing to recognize the same problems with oligopolies. In fact, many observers consider oligopolies competitive when, in fact, they are acting in parallel to interfere with competition. For consumers and ultimately for investors, when companies act in parallel, it’s like dealing with a monopoly.
Lack Of A Level Playing Field
It all boils down to this. Oligopolies can seem to be competitive when they are not. They can present themselves as full participants in the free market, when that simply isn’t the case. When they do this, there is no level playing field and regulators tend to look the other way.
It is this lack of a level playing field that presents the real problem. Without competition, the free market system on which capitalism is based doesn’t work. When that system doesn’t work, investors cannot make intelligent decisions about buying and selling stocks since they are not in on the “collusion” taking place.
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Technically, oligopolies can exist in almost any industry. In practice, they tend to be concentrated in certain ones. These include cable television services, the entertainment industry, airlines, mass media, computers and software, smart phones and operating systems. Aluminum and steel, oil and gas, the automobile industry.
Corporations of note in mass media, for example include The Walt Disney Co. (NYSE:DISC), Time Warner Inc. (NYSE:TWXC), CBS Corporation (NYSE:CBSC), Viacom Inc. (NASDAQ:VIABA) and News Corp. (TSX:NWSAC).