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Oligopoly is a market structure in which a very few large firms control the great majority of the market. This market structure is one in which collusion can easily occur between the firms that are big players in the market. Government regulation is useful to the extent that it prevents collusion from occurring.
For example, the airline industry, especially in past decades, was an oligopoly. The government believed that it was important to regulate that market so as to prevent the airlines from colluding to keep prices high. Government must ensure that competition will happen even in an oligopoly. Of course, the government must take care so as not to overregulate. In the case of the airline industry, the government seems to have made this mistake because deregulation of the industry actually led to more competition and lower prices.
In short, then, governments should ensure that oligopolies remain competitive, but should not engage in excessive regulation that ends up stifling competition.
Another role the government can play is to foster an environment in which an oligopoly loses its power for collusion through the entry of others into the market, providing more competition. Historically, utilities have gone from being monopolies to being oligopolies. Is the next step for the government to provide more help for others to enter this market, for example, in the alternative energy industry, through subsidies and/or tax breaks? These can be phased out once a company gets on its feet. Certainly, other countries do this routinely today. This is a politicized issue, but there is certainly something to be said for moving an oligopoly along closer to pure competition, which would mean less government intervention in the long run.
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