Meaning, Features and Classification
In this article we are going to discuss about Oligopoly Market – Meaning, Examples, Features and Classification. Micro Economics Notes
“Oligopoly” is a term derived from two Greek words “Oligos” meaning a few “pollein” meaning to sell. Thus Oligopoly refers to that form of imperfect competition where there will be only few sellers producing either a homogenous product which are close substitutes but not perfect substitutes or similar products.
There are only few sellers of a product under oligopoly due to which actions taken by any individual seller have a significant impact on other sellers. There is a personalized competition under oligopoly. All firms act as rivals of each other. The most important feature of oligopolistic market is interdependence in decision making.
Perfect example of Oligopoly in India is Indian telecom Industry. In telecom industry, there are only few sellers for example Reliance Jio, Airtel, BSNL, IDEA etc. All these act as rivals of each other. Also when one company increases or decreases tariff charges, this is also followed by other companies.
Following are the features of oligopoly which distinguish it from other market structures:
1. Few Number of Sellers
Under Oligopoly, there are only few sellers producing either a homogenous product which are close substitutes but not perfect substitutes or similar products.
2. Interdependence of firms
The most striking feature of Oligopoly market is the interdependence of the firms operating in similar industry. Since the products of oligopolist are close substitute, the price and output decisions of one will surely affect the other firm’s pricing and output decision. The oligopolist has to take into account the actions and reactions of his rivals while deciding his price and output policies.
3. Price rigidity
Another important feature of oligopoly with product differentiation is price rigidity. The price will be kept unchanged because any change in price by one oligopolist invites retaliation and counter- action from others. So, the oligopolist normally sticks to one price because they do not want to enter into price competition. If an oligopolist reduces his price, his rivals will also do so and therefore, it is not advantageous for the oligopolist to reduce the price.
4. Indeterminate demand curve
This feature is a natural outcome of the first feature. No firm in Oligopoly can forecast the nature and position of the demand curve with certainty. The firm cannot estimate the sales when it decides to reduce the price of its product. Hence the demand curve under oligopoly is indeterminate.
5. Group behaviour
Another important feature in Oligopoly market is the conflicting attitudes of the firms. The firms under oligopoly are interdependent and they know the importance of mutual cooperation. Therefore, there is a tendency among them for collusion. Collusion as well as competition prevailed in the monopolistic market leads to uncertainty and indeterminateness.
6. Monopoly power
If there is product differentiation, the firms enjoy some monopoly power because the firms are few and each of them controls a large share of the market. Further, when firms collude with each other, they can work together to raise the price and earn some monopoly income.
7. Selling cost incurred in Advertising
There is tough competition between firms under oligopoly market. They can increase their sales volume only through advertising or by providing better quality products. Advertisement expenditure is used as an effective tool to shift the demand in favour of the product.
Classification of Oligopoly
1. Pure or perfect Oligopoly and differentiated or imperfect Oligopoly
Perfect Oligopoly: If the firm under oligopoly produces homogenous products, it is said to be perfect Oligopoly. For example Steel Industry, Aluminum Industry etc.
Imperfect Oligopoly: If the firm under oligopoly produces only close substitutes but not perfect substitutes, it is called imperfect or differentiated Oligopoly. For Example: Production of soap, deodorant, talcum powder etc.
2. Open and closed Oligopoly
Open Oligopoly: Entry of new firm is possible in open oligopoly.
Closed Oligopoly: Entry of new firm is not possible in closed oligopoly.
3. Collusive and competitive Oligopoly
Collusive Oligopoly: In collusive oligopoly, firms under the oligopolistic market act in collusion with each other in fixing price and output.
Competitive or Non-collusive Oligopoly: In such oligopoly, there is lack of understanding between the firms and there are chances of competition between the firms.
4. Partial and full Oligopoly
Partial Oligopoly: In Partial Oligopoly, whole industry is dominated by one large firm which is considered to be the price leader.
Full Oligopoly: In Full Oligopoly, there is absence of price leadership.
5. Syndicated and Organized Oligopoly
Syndicated oligopoly: In Syndicated oligopoly products are sold by firm through a centralised syndicate. Organised oligopoly: Organised oligopoly refers to the situation where the firms organise themselves into a central association for fixing prices, output, quota etc.