Oligopoly exists where a few firms selling similar or distinguished products dominated the market. Firms such as Tesco and Sainsbury are examples of oligopoly and the actions of one will impact on the other, forcing them to respond (Salvatore,2012). Porter makes an observation of the factors which needs to be considered through his 5 forces framework:
Threat of Entry
If the obstacles to enter the oligopoly market are not robust enough, a firm’s profitability will be at risk as others will seek opportunities to enter and force competition. Industries therefore seek to protect profits and deter potential competitors by creating barriers to prevent entry and which minimises competition (Stenbacka,1990). Some of the most effective hindrances are hugh capital investment costs, economies of scale, competing with existing established brands and low pricing (Salvatore,2012). It was not possible for Tesco or Sainsbury to prevent Morrisons from entering the oligopoly market. However, upon entry, Morrisons soon found out that the conditions were such that their ability to successfully compete was severely crippled, as it experienced hugh losses (Smit, 2006). Morrisons which had taken over Safeway at a cost of £3bn made massive losses of £374m (The Guardian, 2006).
Threat from Substitute Products & Intensity of rivalry among existing competitors
Innovation has increased rapidly, particularly in the area of technology and as a result substitute products are readily available. In the mobile phone industry firms are fighting for dominance in the market (Polidoro & Toh, 2011). Within this maze of substitute products, the war is really about maximising returns as firms recognise that substitute products drives up competition and makes demand more elastic (Baye, 2012). Consumers, however, tend to be loyal to particular brands even when substitutes are very close. Two big players and strong rivals in the soft drinks industry are Coca Cola and Pepsi. Although Pepsi has been dogged by branding mishaps over the years it remains a fierce competitor with increased sales. Coca Cola’s understanding of its competitors enabled them to formulate a strategy which secured their dominance in the market (Smit,2006).