Oligopoly
Meaning:- Oligopoly is a common economic system in today’s society. The word “oligopoly” comes from the Greek “oligos” meaning “little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few.” Oligopoly is a market structure in which there are a few sellers and they sell almost identical products. A situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.
There are barriers to entry in oligopoly. Oligopoly is characterized by the tension between cooperation and self- interest among these sellers. It is a competition among few big sellers each one of them selling either homogenous or differentiated products. 2 For example:- If the oligopolist firms can cooperate, they can charge a high price and share profits. But if they cannot cooperate and instead they compete because of following their own self-interest, then price goes down and profits decline. In
dustries which are examples of oligopolies include:
Steel industry
Aluminum
Film
Television
Cell phone
Gas
Telecom service providers
Internet service providers
Automobiles
DEFINITION
In the words of Mansfield “Oligopoly is a market structure characterized by a small number of firms and a great deal of interdependence.” In the words of P.C. Dooley, “ An oligopoly is a market of only a few sellers , offering either homogenous or differentiated products. There are so few sellers that they recognize their mutual dependence.”
Features
The important features of oligopoly are given as follow :
1. Few Sellers
2. Homogeneous or differentiated products
3. Entry is possible but difficult
4. Interdependence
5. Uncertainty
6. Indeterminateness
7. Price rigidity
8. Non price competition
9. Tendency to form cartel
10. Close substitutes
1) Small number of sellers:- There is a small number of sellers under oligopoly. Conceptually, however, the number of sellers is so small and the market share of each firm is so large that a single firm can influence the market price and business strategy of the rival firms Interdependence of .
2) Decision making :- The competition between the firms takes the form of action, reaction, and counteraction between them. Since the number of firms in the industry is small, the business strategy of each firm in respect of pricing, advertising, product modification is closely watched by the rival firms.
3) Interdependence:
– The firms under oligopoly are interdependent in making decision. They are interdependent because the number of competition is few and any change in price & product etc by any firm will have a direct influence on the fortune of its rivals, which in turn retaliate by changing their price and output. Thus under oligopoly a firm not only considers the market demand for its product but also the reactions of other firms in the industry. No firm can fail to take into account the reaction of other firms to its price and output policies. There is, therefore, a good deal of interdependences of the firm under oligopoly.
4) Importance of advertising and selling costs :
-The firms under oligopolistic market employ aggressive
and defensive weapons to gain a greater share in the market and to maximise sale. In view of this firms have to incur a great deal on advertisement and other measures of sale promotion. Thus advertising and selling cost play a great role in the oligopolistic market structure. Under perfect competition and monopoly expenditure on advertisement and other measures is unnecessary. But such expenditure is the life-blood of an oligopolistic firm.
5) Group behaviour :-Another important feature of oligopoly is the analysis -of group behaviour. In case of perfect competition, monopoly and monopolistic competition, the business firms are assumed to behave in such a way as to maximize their profits. The profit-maximizing behaviour on his part may not be valid. The firms under oligopoly are interdependent as they are in a group.
6) Indeterminateness of demand curve :-This characteristic is the direct result of the interdependence characteristic of an oligopolistic firm. Mutual interdependence creates uncertainty for all the firms. No firm can predict the consequence of its price-output policy. Under oligopoly a firm cannot assume that its rivals will keep their price unchanged if he makes charge in its own price. As a result, the demand curve facing an oligopolistic firm losses its determinateness. The demand curve as is well known, relates to the various quantities of the product that could be sold it different levels of prices when the quantity to be sold is itself unknown and uncertain the demand curve can’t be definite and determinate. 7) Elements of monopoly :- There exist some elements of monopoly under oligopolistic situation. Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. In such a case it acts in its sphere as a monopolist in lining price and output.
8) Price rigidity :-Under oligopoly there is the existence price rigidity. Prices lend to be rigid and sticky. If any firm makes a price-cut it is immediately retaliated by the rival firms by the same practice of price-cut. There occurs a price-war in the oligopolistic condition. Hence under oligopoly no firm resorts to price-cut without making price-output decision with other rival firms. The net result will be price -finite or price-rigidity in the oligopolistic condition.
9) Barriers to Entry:- Firms in an oligopolistic industry attain and retain market control through barriers to entry. The most noted entry barriers are: (1) exclusive resource ownership, (2) patents and copyrights, (3) other government restrictions, and (4) high start-up cost. Barriers to entry are the key characteristic that separates oligopoly from monopolistic competition on the continuum of market structures. With few if any barriers to entry, firms can enter a monopolistically competitive industry when existing firms receive economic profit. This diminishes the market control of any given firm. However, with substantial entry barriers found in oligopoly, firms cannot enter the industry as easily and thus existing firms maintain greater market control.
10) Homogenous or differentiated Product:
– Firms in oliogopolistic industry may produce either homogenous or differentiated products. If the firms produce a homogenous product like cement or steel the industry is called pure or perfect oligopoly. If the firms produce a differentiated product like automobile, the industry is called differentiated or imperfect oligopoly.
11) Lack of uniformity:- Another features of oligopoly is lack of uniformity in the size of firms. Some firms may be very large and others may be small. For example the share of Maruti Udyog is 86% in small car segment of the Automobile industry, while the share of Ceilo or Tata is comparatively much less.
12) Keen competition:
– The oligopoly is characterized by the presence of keen competition among rivals. Under oligopoly, the number of seller is so small that any move by any one seller immediately, affects the rival sellers. As a result, each firm keeps a close watch on the activities of the rivals firms and prepare itself to counter it. To an oligopolist, business is a life of constant struggle as market conditions necessitate moves and counter moves. This kind of competition is unique and is not found in other type of markets. Oligopoly is therefore the highest form of competition.
13) Uncertainty:- In an oligopoly due to interdependence of firms on each other, no certain prediction about the behaviour of different firms can be made. It is difficult to calculate the consequence of current economic change on the basis of facts already in existence. So uncertainity prevails in
oligopolistic market.
Oligopoly Classification
Oligopoly can be classified on different basis:
1. Pure Versus Differentiated Oligopoly- Oligopoly is classified as pure or perfect and differentiated on the basis of product differentiation. If the products of various firms are homogeneous the term pure oligopoly is applied. On the other hand, oligopoly is imperfect then the competing firms are not homogeneous. The stronger the differentiation, the weaker will be feeling of mutual interdependence. Differentiated oligopoly is characteristic of a very large portion of the economy.
2. Open Oligopoly versus Closed Oligopoly- On the basis of possibility of entry of firm’s oligopoly may be classified into open oligopoly and closed oligopoly. An open oligopoly refers to that market situation which allows free and easy entry of new firms. Closed oligopoly on the other hand implies that the industry is controlled by a few firms and entry of competitors is prevented.
3. Partial oligopoly and Full Oligopoly- Yet another classification of oligopoly is based on the presence or absence of price leadership. On this basis partial oligopoly refers to the predominance of the industry by one or a few large firms followed by a cluster of small firms. Full oligopoly is a state of less equal status with no price leadership.
4. Collusive and Non-Collusive Oligopoly- On the basis of the existence or non-existence of agreements among sellers we have collusive oligopoly, other otherwise will be collusive.
5. Syndicated Oligopoly and Organized oligopoly- Oligopolies which have centralized selling through syndicates have been characterized as syndicated oligopolies. These which have entered into some agreement about price, input quotes and sharing of the market have been termed as organized oligopolies.
