The basic oligopoly definition is: "A distinct legal situation in which a handful of highly organized producers controls a relatively large portion of a protected market." An obvious example of an economy in which the definition of an oligopoly overlaps is the oil and gas industry. Oil producers are usually large-scale corporations with many employees, facilities, and other assets. Gas stations, oil refineries, trucking fleets, and oil drilling rigs all fall into the definition. In all these cases, the concentration of power in a few hands is concentrated in the hands of a few individuals.
A majority of the world's economy still falls into this classic oligopoly definition, though many nations have reformed their industries during the past two centuries. One of the greatest perils of an economy dominated by an oligopoly is the increasing inability of those firms to attain the scale needed for national success. An economy with a monopoly on certain essential resources will not be able to achieve the goals of its citizens and can even result in less affordable goods and services for its consumers. In reality, an economy can only be managed if the level of consumer welfare and economic growth is sufficiently high relative to the size of the firms who control the economy. Without this, a new institution can quickly form which can quickly overcome an entrenched monopoly.
The most common and perhaps the most worrisome form of an oligopoly definition happen when two or more firms control a significant portion of a given market. For example, a corporation may become self-confident that it can secure a ten percent share of the global oil market. If, however, that same corporation also owns refineries, oil trucks, and other necessary infrastructure required for transporting that oil, then it has virtually guaranteed itself an undivided monopoly. These firms can then increase their price above the competition by charging higher prices or using other tactics to insure that they have a large slice of the market. This allows them to increase their profits while keeping prices at their minimum.
A more subtle form of an oligopoly definition occurs when two firms have determined that they can effectively monopolize a given market structure. Rather than competing to supply customers with the best products, they choose to do so by creating a monopoly. By avoiding direct competition, they have determined that they can dictate prices and extract profits by exercising more market power. This forms a growing barrier to entry for new firms wishing to enter the marketplace. Eventually, the remaining competitors are forced into accepting competitive terms in order to survive.
Even a relatively small concentration of market power can threaten the stability of an economy. For example, a firm with a thirty percent share of a targeted segment of the market can threaten to eliminate that segment entirely if the other firm's share of the pie falls below a specific limit. This results in a severe decline in customer satisfaction, as firms compete for a smaller portion of the market. The result is lower overall economic output and higher unemployment. In an economy where economic stability is critically important to the wellbeing of society, the threat of corporate consolidation under these circumstances is often considered to be a severe problem.
Since this oligopoly definition presents so many different interpretations, it's important to remember that there is no universally accepted interpretation. Rather, each case is evaluated on a case-by-case basis in light of the individual facts of a specific jurisdiction. In addition, there are many potential consequences of a monopolistic firm forming. Monopolistic firms may increase corporate value, but also raise costs and reduce efficiencies through increased corporate control and management techniques, lower investment and risk, impede research and development, and reduce overall productivity and standard of living across the board.
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