BE/U5 Topic 8 Indeterminate Price and Output in Oligopoly
The term oligopoly has been derived from two Greek words, ‘oligoi’ means few and ‘poly’ means control.
Therefore, oligopoly refers to a market form in which there is a control of few sellers on the market. These sellers deal either in homogenous or differentiated products.
Oligopoly is one of the forms of an imperfectly competitive market In India the aviation and telecommunication industries are the perfect examples of oligopoly market form. The aviation industry has only few airlines, such as Kingfisher, Air India, Spice Jet, and Indigo.
On the other hand, there are few telecommunication service providers, including Airtel, Vodafone, MTS, Dolphin, and Idea. These organizations are closely interdependent on each other This is because each organization formulates its own pricing policy by taking into account the pricing policies of other competitors existing in the market.
Characteristics of oligopoly:
(i) Few sellers and many buyers
(ii) Homogeneous or differentiated products
(iii) Barriers to entry and exit
(iv) Mutual interdependence among organizations
(v) Existence of price rigidity
(vi) Lack of uniformity in the size of organizations
In oligopolistic market situation, a small number of organizations compete with each other. The sales of each organization under oligopoly depend on the price charged by it as well as the price charged by other organizations in the market. If an organization lowers down its prices, its sales would increase.
However, the sales of other organizations in the market would decrease. In such a scenario, other organizations would also lower down their prices. Therefore, the price and output are indeterminate under oligopoly. In other market structures, such as perfect competition and monopoly, price and output are determined by taking into account demand, supply, revenue, and cost factors.
In such type of market structures, the actions and reactions of other organizations related to any pricing-decision are ignored. According to Miller, “in a perfectly competitive model, each firm ignores the reaction of other firms because each firm can sell all that it wants at the going market price. In the pure monopoly model, the monopolist does not have to worry about the reaction of rivals since by definition they are none. However, there is interdependence of firms in the oligopoly. Hence, the decisions of a firm will affect the other firms, which in turn will react in way that affects the initial firm. This causes uncertainty. Thus, it is a difficult task to draw the demand curve of an oligopolist.”
The main reasons for indeterminate price and output under oligopoly are as follows:
- Different Behavior Patterns
Imply that under oligopoly, the behavior patterns differ from organization to organization For example, under oligopoly, organizations may cooperate with each other in setting the pricing policy or they may act as competitors.
According to Baumol, “under the circumstances a very wide variety of behavior patterns becomes possible. Rivals may decide to get together and co-operate in the pursuit of their objectives so far as the law allows, or at the other extreme they may try to fight each other to the death.” Thus, under oligopoly, the price and output of organizations differ in different behavior patterns.
- Indeterminate Demand Curve
Implies that the demand curve is unknown under oligopoly due to different behavior patterns of organizations. Under oligopoly, every organization keeps an eye on the actions of rivals and makes strategies accordingly.
Therefore, the demand curve under oligopoly is never stable and shifts in response to the actions of rivals. According to Baumol, “the firm’s attempts to outguess one another are then likely to lead to interplay of anticipated strategies and counter strategies which is tangled beyond hope of direct analysis.”
- Non-profit Motive
Implies that under oligopoly, organizations are not only indulged in maximizing profit, but also compete with each other for non-profit motive. For example, organizations use advertising and other tools to promote their sales. These motives lead to indeterminate price and output under oligopoly.