Venture capitalists consider various factors before investing their funds in a given industry, the first being profitability, and the chances of succeeding when operating in this market. A comparison on the various market structures indicates that the oligopoly market structure provides better chances for a new firm to attain maximum profits. An oligopoly market structure comprises few firms that own a significant portion of the industry market share and have an influence on the decisions of other firms in the same industry.
Oligopoly firms are more stable compared to firms in other market structures, as the level of collaboration amongst the firms is high. New businesses operating in this market are assured of stable cash inflows for long periods due to its stability, therefore, they can accrue maximum returns on their investment. According to Carranza et al. (2015), firms operating in an oligopoly market structure exercise a level of control over pricing decisions, hence, they can realize maximum profits. At times, these firms make unified decisions on the acceptable price of products putting into consideration that within an economic environment, firms exist to maximize profitability. The customers in this market have no control over prices. A new firm, therefore, can attain maximum profits since it does not face the risk of having to sell their products at reduced prices due to changes in supply and demand of their products.
There are many barriers to entering an oligopoly market. A potential investor or a new business in this market structure needs to have large sum of funds to acquire a controlling share in the market. One of the brriers in this market arises when existing firms collaborate and increase barriers to entry to reduce competition. Therefore, a new firm that successfully ventures into this market is assured of few competitors and can operate under favorable policies that boosts their income. As Ovodenko (2016) explains, most firms operating in an oligopoly market structure operate at large scale, for instance, the oil industry. This means, they enjoy economies of scale and low cost of production per unit, thereby, guaranteeing profitability. Given the primary features of oligopoly markets, new businesses stand a better chance of realizing returns on their investment.
- Carranza, J. E., Clark, R., & Houde, J. F. (2015). Price controls and market structure: Evidence from gasoline retail markets. The Journal of Industrial Economics, 63(1), 152-198.
- Ovodenko, A. (2016). Governing Oligopolies: Global Regimes and Market Structure. Global Environmental Politics, 16(3), 106-126.