Definition
Monopoly and oligopoly describe markets where a product or service is sold by just one seller or a very small handful of sellers. These sellers have more power to set prices higher than in a competitive market, which narrows consumer choice and can make the economy less efficient overall.
One seller vs. a few sellers
Imagine the snack shop at a school. Thousands of students can use it, but there's only one. What happens? Even if the owner doubles the price of a sandwich, hungry students have nowhere else to go, so plenty of them will still buy. A market with only one seller is called a monopoly.
An oligopoly is different. A few giant companies split almost the whole market. Think of the big three wireless carriers in the U.S., like Verizon, AT&T, and T-Mobile, or the major oil companies. With only three or four sellers, they may look like they're competing, but each one watches the others' prices and moves very closely.
Both structures share one thing: consumers have very few choices. That's because high barriers to entry keep newcomers out. These barriers can be huge factories, patents, or legal rules.
What happens when competition disappears?
If a neighborhood has ten pizza shops, each one tries to win customers by cutting prices or inventing tastier menu items. But when one or two firms take over the market, they have little reason to work hard on new technology or lower prices. Customers show up anyway.
In an oligopoly, a sneaky move called collusion (or a cartel) often shows up. A few companies secretly meet and agree, "Let's all raise prices 10% and stop fighting each other." Then consumers have no choice but to pay an unfairly high price.
Also, when a startup with a fresh idea appears, a giant firm may use its deep pockets to push it out of the market or buy it cheaply just to shut it down. That can slow down technology and creativity across the whole market.
To be more precise: is it always bad?
So should every monopoly or oligopoly be broken up? To be more precise, in infrastructure industries that need massive investment, like electricity, water, and railways, it can actually be better for society when one big company handles everything. This is called a natural monopoly.
Think about water pipes. If several companies competed to lay pipes to every house, roads would get dug up ten times over. What a waste! In industries where economies of scale work, meaning the cost per unit drops sharply as production grows, a monopoly can be more efficient.
But a company can't be allowed to abuse that power and charge sky-high prices. That's why natural monopolies are mostly managed by having the government approve rates, or by having a public enterprise run them. Other monopoly and oligopoly markets are watched by the Korea Fair Trade Commission, which works like the antitrust regulator in the U.S. It catches collusion and imposes heavy fines (in serious cases it refers them to prosecutors for criminal punishment), and it reviews mergers. Through Korea's Monopoly Regulation and Fair Trade Act, it protects a fair and orderly market.
Common misconceptions
An oligopoly has several companies, so they always compete fiercely.
When there are too few companies, they may secretly fix prices through collusion (a cartel) or just watch each other's moves instead of competing. Consumers can end up hurt almost as much as under a monopoly.
Where you meet it
The smartphone operating system market is split between two companies: Google's Android and Apple's iOS.
Electricity and tap water need a network of equipment, so a single provider, such as a public utility or a local government, usually serves a whole region.
In one sentence
A monopoly means one seller dominates a market, and an oligopoly means a few do. Less competition raises the risk of higher prices and collusion.