Oligopoly:
Meaning:
Oligopoly is an important form of imperfect competition, where there is a competition among a few sellers.
Definition:
Oligopoly is that form of market structure in which there are a few firms selling a product so that there is intense competition among them.
In general, when the number of seller of a product is two to ten, it is a situation of oligopoly market.
In most modern economies, oligopoly is the main market structure for the production of a large number of goods like automobiles, electronic products and many of the consumer products like baby foods, vegetable oils, soft drinks etc.
Features of Oligopoly:
1. Intense Competition
2. Interdependence
3. Homogeneous or Non – homogeneous product
4. Importance of Selling Cost
5. Barriers of Entry
6. Indeterminate Demand Curve of an Oligopolist.
1. Intense Competition :
- Oligopoly is characterised by intense competition. Oligopoly is the highest form of inter – firm competition among a few competitors.
- It is the market form where only a few firms are selling homogeneous or differentiated product.
- Each firm, with only a few rival firms, knows that it has a significant market power. But it also knows that the other firms also have the same.
- The number of firms is so small that any action of a firm is likely to affect the rival firms. Therefore, each firm keeps a close watch on the action of rival firms.
- It is always busy in preparing an appropriate strategy to deal with the rival firms. It has to involve in both aggressive and defensive strategies to survive and prosper in the competition.
- This way in oligopoly there is an intense competition among firms.
2. Interdependence:
- In oligopoly, there is an interdependence of firms in respect of decision – making.
- Since, there is only a few number of firms, facing intense competition with each other, any change in price, output product, etc, by one firm will affect the rival firms and will force them to react by changing their price, output, product, etc.
- It is this interdependence, action and reaction by the rival firms which sometimes leads to price – war and price cutting among the competitors.
- Example, if Maruti Udyog offers free insurance cover to the buyers of Maruti cars, the other car companies like Santro may also make the same offer to its buyers.
3. Nature of the Product:
- In oligopoly the product may be homogeneous or differentiated.
- On the basis of product, oligopoly may be classified as pure oligopoly and differentiated oligopoly.
- The oligopoly without product differentiation means with homogeneous product is called pure oligopoly.
- Example, cooking gas of Indane and HP are the example of pure oligopoly.
- Oligopoly with product differentiation like – automobile industry, Maruti, Santro and Indica are the examples of differentiated oligopoly.
4. Importance of Selling Cost:
- In oligopoly selling cost is very important.
- Since there is intense competition and interdependence of firms in oligopoly, the firms compete each other through various measures like price – cutting, discounts, door – to – door campaign, advertisement etc.
- Thus, there is a great importance of selling costs and advertisement under oligopoly market structure.
- TV commercial war among Coke and Pepsi is testimony to this fact.
5. Barrier to Entry :
- Since oligopoly is characterised by only a few firms, competing with each other, to retain this feature in long run, the entry of new firm is strictly restricted.
- If the entry is not closed, many new firms would enter into the profit making industries and would wipe out the profit in long run.
- Some major barriers to entry are economies of large scale production, cost advantage of existing firms, price – cutting, control over important inputs, patent rights, etc. These factors prevent the entry of new firms and preserve the oligopoly.
6. Indeterminate Demand Curve of an Oligopolist :
- A demand curve shows the amount of the product a firm can sell at various prices.
- A firm, under perfect competition or monopoly or monopolistic competition, shows definite demand curve, because the firm is not affected by the action of rival firm.
- But in oligopoly due to intense competition the firm can not ignore the reaction of rival firms in view of the interdependence of firms.
- Any change in the price by one firm may result in a change in price by rival firms.
- Thus, the demand curve of oligopolist keeps on shifting and would not be definite, instead it is indeterminate.