DEFINITION: An oligopoly is a market that is dominated by a small number of sellers.

ETYMOLOGY: The word “oligopoly” derives from the Greek adjective oligos, meaning “a little (not much)” or “few (not many),” and verb pōleō, meaning “sell.”

USAGE: In theory, markets with several sellers ought to be competitive. After all, an oligopoly is not a monopoly. In a purely rational world, one might expect that even two or three sellers would suffice to form a perfectly free market.

In practice, however, human beings are not perfectly rational economic actors.

Or perhaps it would be more accurate to say that they will attempt to bend the rules of the game in their own favor, wherever possible.

Specifically, companies that enter into an oligopoly negotiate among themselves over prices. This practice is called “price fixing.”

Why would a company enter into a price-fixing agreement, rather than compete head-to-head with its competitors, letting the invisible hand of the free market set the final price?

Because prices fixed by companies entering into an oligopoly are typically much higher than the prices that emerge from a truly competitive market.

To paraphrase the philosopher Bertrand Russell, oligopolies possess all the advantages of theft over honest toil.

Thus, when there are only a few economic actors present in a given market, the temptation to oligopoly is always present.

Moreover, due to decades of mergers and buy-outs, the number of economic actors in many, if not most, modern markets has been drastically reduced.

In other words, we are now living in the age of oligopoly.