Is it an Oligopoly?

Everyone loves buying how much of a good they want at a price that they feel is fair.  Perfectly competitive markets allow this, because suppliers are forced to sell their goods at the price and quantity determined by the market.  Oligopolies and monopolies, however, don't sell where the supply and demand curves intersect.  They are able to take advantage of the fact that there are few suppliers in the industry and charge a higher price for their product while intentionally supplying less to you, creating a shortage in the market.  When there is a shortage, the good is more scarce and therefor costs more.

Economists have ways of calculating how much control firms have over a market.  For an individual firm, economists calculate the firms "market share," or how much of the market their goods consist of. For example, right now the Google phone controls 27% of the smartphone market and the iPhone has 23%. So between the two firms, they control half of the entire smartphone industry.  This gives them the oligopoly to demand higher prices from you while limiting the amount of phones they release. Remember the limited number of iPhones and shortages when they first came out?

Economists also analyze industries as a whole to see how monopolistic, oligopolistic or competitive they are.  There are two main indexes; 4 Firm Concentration  Ratio and the Herfindahl-Hirschman Index (HHI).  The four firm concentration ratio is exactly what it sounds like, economists just add together the market shares of the largest four firms. Easy as pie.  The HHI index is simple too, it just involves adding up the square of all the market shares in the industry. Again looking at the cell phone industry, the four firm calculation shows us that 94% of the market is controlled by the top 4 firms.  This is a perfect example of an oligopoly, as a few firms control the entire market.  The HHI for the smart phone industry is 2515.  This is on a scale of 1-10,000, with 1 being a total monopoly and 10,000 being perfectly competitive.  As this number is about 3/4 the way to monopoly, we can see that it ranks the industry as being an oligopoly.

Economists love their figures and indexes, it is a great way for us to portray information to each other and the general public in a way that is easy to understand.  In the complex world of market classifications, where the lines between monopolistic competition and oligopoly tend to be very grey, these indexes help us decide what is what.

-Brandon