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7/25/07

Understanding Oligopolies

An oligopoly is much like a monopoly except that at least two firms or producers exist. The fear that exists with monopolies also exists with oligopolies except that oligopolies can work out better for the consumer. For example purposes, let us use the satellite radio market. Sirius and XM are the two biggest companies in this industry. I believe that a small Canadian satellite radio company exists, but for the most part, nearly all satellite radio subscribers use XM or Sirius.

Currently, XM and Sirius are in an oligopoly. These two firms control the satellite radio industry. However, because they are such fierce competitors, this works out well for the consumer. The radio base technology gets better, the content gets better, and the number of available channels increase, yet radio unit prices have stayed low and monthly subscription rates have also remained low. This is obviously good for the consumer because it gives the consumer a choice. Although only two firms exist, you can still choose between XM and Sirius.

Oligopolies can turn ugly when the firms that exist in such decide to team up and form a cartel of sorts. For example, if XM and Sirius agreed that each would charge its customers $30 per month, short of canceling their accounts, there is not much a consumer can do. This price fixing and taking advantage of the customer is what law makers fear. This is also what is prevented by disallowing monopolies.

Law makers fear that XM and Sirius, if merged, would create a monopoly and do bad things such as raise prices on subscriptions and radio units. Compared to a monopoly a competitive oligopoly seems great. Just remember, because so few firms or producers exist in an oligopoly, there always exists a potential for abuse.


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