Oligopoly is a market structure of few sellers, where few firms dominate the whole market. Sellers are the main supplier and gain all the output of market. Now let us see what are the elements which enable the oligopoly.
Large investment capital:
A new entry is a ban in oligopoly structure because of very heavy investment. A new entry may have fear of cost maintenance because of established firms because it is true that in midst of product it is difficult to make a new product.
Absolute cost advantage:
Small firms always have an absolute cost advantage on raw material, training, techniques, natural resources, economic resources, where new entrants cannot survive and small firms earn a profit even in low price.
Small firms have strong marketing chain and network. As new entry comes, they compete them out through different strategies.
Product differentiation:
Small firms get an advantage of product differentiation. Buyers develop the loyalty to the brand so for new entry it is very difficult to compete for a brand and gain customer loyalty until unless they make any superior thing than that brand.
Mergers:
Modern businesses now have learned to merge to eliminate competition.
Doing this, the number of firms decline, profit increases and oligopolies are established.
Informal collusion:
Mergers are formed but mergers have some constitutional complexities. So to avoid the law complications most firms have informal agreements between them to earn the profit and get rid of law bindings.
