Oligopoly: features and concentration ratios

The features of an oligopoly first, then concentration ratios from real grocery shares and from sales data, and why a few large firms have to watch each other.

What makes a market an oligopoly?

An oligopoly is a market dominated by a few large firms. Every model starts from its assumptions, so learn these first: they are also the answer to the exam question “explain the main characteristics of an oligopolistic market”.

1. A few large firms dominate. Measured with a concentration ratio, which you will calculate in this lesson.
2. Interdependence. Each firm’s decisions change its rivals’ sales, so it must predict how they will react.
3. Barriers to entry, such as economies of scale, brand loyalty or high sunk costs.
4. Products may be differentiated or identical. Supermarkets and cars are differentiated; oil and cement are almost identical.
5. Non-price competition is common, because price cuts are easily matched.
6. The temptation to collude, openly or tacitly, because firms can earn more together than by competing.

Groceries in Great Britain are a good example. Start with the first feature: how dominant are the largest firms?

Think first

Britain has thousands of places to buy groceries.

Roughly what share of all grocery spending goes to just the four largest supermarket groups?

About two-thirds. In the 12 weeks to 4 October 2026, the four largest grocers took 65.0% of all grocery spending in Great Britain, according to the market research firm Worldpanel. That is a four-firm concentration ratio of 65%.

Step by step

1. These are Worldpanel’s shares of grocery spending in Great Britain over the 12 weeks to 4 October 2026, largest first. Northern Ireland is measured separately and its ranking is different.

2. Tesco alone takes over a quarter of all grocery spending. One firm can be big without the market being an oligopoly, so we look at the largest few together.

3. One firm is not enough. So which firms do we add together?

   Check: A four-firm concentration ratio adds the shares of which four firms?

   A concentration ratio always uses the largest firms by market share at the time of the data, so rank the firms first.

4. A concentration ratio is the combined market share of the largest firms. If you are given sales instead of shares, divide the sales of the n largest firms by total market sales and multiply by 100. Here the shares are already percentages, so just add them. The four-firm ratio, CR4, adds the top four: 27.8 + 15.2 + 11.5 + 10.5 = 65.0%.

   Teacher tip: If a table has an “Others” row, never count it in a concentration ratio. It is many small firms grouped together, not one firm.

5. Notice the fourth firm is Aldi, not Morrisons. People still talk of the “big four” of Tesco, Sainsbury’s, Asda and Morrisons, but Aldi passed Morrisons in 2022 and Lidl followed in 2026. A concentration ratio uses the largest firms by share today, so rank them first, every time.

6. Add the fifth largest, Lidl, and the five-firm ratio, CR5, is 73.6%. The question will tell you which ratio to calculate.

   Check: The four largest firms have shares of 30%, 20%, 15% and 10%. What is the CR4?

   Add the four largest: 30 + 20 + 15 + 10 = 75%.

7. Why does concentration matter? With a few large firms, each one’s decisions change its rivals’ sales. They are interdependent. When Aldi wins customers on price, the others respond: Tesco and Sainsbury’s both run schemes that match some of Aldi’s prices, and loyalty-card prices are a way to compete without cutting prices for everyone.

8. So how much does a concentration ratio really tell you?

   Check: Which of these can a national concentration ratio not tell you?

   The ratio measures market structure: how much of the market the largest firms hold. It says nothing about how those firms behave towards each other.

9. Less than it first seems.

A common mistake

They used Morrisons, one of the old “big four”, instead of the fourth largest firm, Aldi. The correct CR4 is 65.0%.

Exam question

The four-firm concentration ratio for groceries in Great Britain is 65%. Explain what this suggests about the market, and give one limitation of the measure.

Model answer

A four-firm concentration ratio of 65% means the four largest grocers together take almost two-thirds of all grocery spending in Great Britain. With most of the market in so few hands, the industry is an oligopoly. Each large firm’s decisions affect its rivals’ sales, so the firms are interdependent: before cutting prices or opening stores, each must think about how the others will respond. This is why they often compete through loyalty-card prices and price-matching schemes rather than open price cuts, and why there may be a temptation to collude.

However, the ratio has limits. It is a national figure, so it hides local markets where a shopper may have only one or two supermarkets nearby, and it does not show whether the four are similar in size or one is dominant. Nor does it show how the firms behave: a high ratio is consistent with fierce competition, as the growth of Aldi and Lidl shows.