The word Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and ‘Polein’ meaning ‘to sell’. An Oligopoly market situation is also called ‘competition among the few’. In this article, we will look at Oligopoly definition and some important characteristics of this market structure.
An oligopoly is an industry which is dominated by a few firms. In this market, there are a few firms which sell homogeneous or differentiated products.
Also, as there are few sellers in the market, every seller influences the behavior of the other firms and other firms influence it.
Oligopoly is either perfect or imperfect/differentiated. In India, some examples of an oligopolistic market are automobiles, cement, steel, aluminum, etc.
Characteristics of Oligopoly
Now that the Oligopoly definition is clear, it’s time to look at the characteristics of Oligopoly:
(i) Few firms
Under Oligopoly, there are a few large firms although the exact number of firms is undefined. Also, there is severe competition since each firm produces a significant portion of the total output.
(ii) Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry like patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into the industry.
(iii) Non-Price Competition
Firms try to avoid price competition due to the fear of price wars and hence depend on non-price methods like advertising, after sales services, warranties, etc. This ensures that firms can influence demand and build brand recognition.
Under Oligopoly, since a few firms hold a significant share in the total output of the industry, each firm is affected by the price and output decisions of rival firms. Therefore, there is a lot of interdependence among firms in an oligopoly. Hence, a firm takes into account the action and reaction of its competing firms while determining its price and output levels.
(v) Nature of the Product
Under oligopoly, the products of the firms are either homogeneous or differentiated.
(vi) Selling Costs
Since firms try to avoid price competition and there is a huge interdependence among firms, selling costs are highly important for competing against rival firms for a larger market share.
(vii) No unique pattern of pricing behavior
Under Oligopoly, firms want to act independently and earn maximum profits on one hand and cooperate with rivals to remove uncertainty on the other hand.
Depending on their motives, situations in real-life can vary making predicting the pattern of pricing behavior among firms impossible. The firms can compete or collude with other firms which can lead to different pricing situations.
(viii) Indeterminateness of the Demand Curve
Unlike other market structures, under Oligopoly, it is not possible to determine the demand curve of a firm. This is because on one hand, there is a huge interdependence among rivals. And on the other hand there is uncertainty regarding the reaction of the rivals. The rivals can react in different ways when a firm changes its price and that makes the demand curve indeterminate.
Firms behaviour under Oligopoly
Based on the objectives of the firms, the magnitude of barriers to entry and the nature of government regulation, there are different possible outcomes in relation to a firm’s behavior under Oligopoly. These are:
- Stable prices
- Price wars
- Collusion for higher prices
Further, Oligopoly can either be collusive or non-collusive. Collusive oligopoly is a market situation wherein the firms cooperate with each other in determining price or output or both. A non-collusive oligopoly refers to a market situation where the firms compete with each other rather than cooperating.