Oligopoly

Meaning of Oligopoly

The words "Oligopoly" are derived from two Greek words, "Oligo," which means "a few," and "pollein," which means "to sell." Oligopoly describes the scenario where there are only a few vendors for the same good. It is a type of market structure where a small number of suppliers offer the same or different products. Market conditions known as oligopolies are dominated by a small number of companies. Similar to a monopoly, an oligopoly occurs when one company or group controls the majority of a market. A market is controlled by at least two companies in an oligopoly. In an oligopolistic market, the exact number of vendors is not specified by economists. However, oligopoly can only exist when there are two sellers. The market is referred to as a duopoly when there are just two sellers. Oligopoly situations can be categorized based on a variety of factors, including I product differentiation, ii) firm entry, iii) pricing leadership, and iv) agreement.

Characteristics of Oligopoly

• Interdependence: Oligopoly allows businesses to make decisions on their own. The reason for this is that there isn't much competition, so any change in a company's product or pricing will immediately affect the chances of its competitors, who will then respond by altering their own output and price. As a result, in an oligopoly, a company considers both the demand for its product from the market and the reaction of other companies in the sector. No company can neglect to consider how other companies will react to its pricing and output policies. As a result, the firm is highly interdependent under an oligopoly.

• Importance of selling costs: In an oligopoly, businesses use both defensive and offensive strategies to get a larger market share and optimize their own sales. Due to this, businesses must spend a lot of money on advertising and other methods of sale promotion. As a result, the cost of selling and advertising is quite important in the oligopoly market structure. Spending on advertising and other initiatives is not required in monopoly and perfect competition markets. But under an oligopoly, these advertising expenses are the company's lifeblood.

• Indeterminateness of demand curve: This characteristic is a direct outcome of the oligopolistic firm's interdependence trait. Every company is subject to uncertainty due to their mutual interconnectedness. No company can predict the outcome of its price-output strategy. In an oligopoly, a company cannot assume that its competitors would maintain their prices if it changes its own pricing. The demand curve that a firm faces under an oligopoly loses its determinateness as a result. The demand curve, as is well known, has to do with the various product quantities that could be sold at various price points. The demand curve cannot be precise and deterministic if the quantity to be sold is inherently unknowable and indeterminate.

• Price rigidity: The rigidity of subsistence prices exists in an oligopoly. Prices frequently exhibit rigidity and stickiness. When a company lowers its prices, its competitors are quickly hit with the same price reduction strategy. When there is an oligopoly in a market, there is a price war between the companies. In an oligopoly, no firm can lower prices without consulting its competitors about output and price. Price rigidity or price -finiteness in an oligopoly market will be the end result.

• Barriers to Entry: The following market factors result in entrance barriers to an oligopolistic industry:

  • Matching the manufacturing capability of the existing ones requires a significant investment.
  • Economies of scale and the unquestionable cost advantage that incumbent businesses enjoy.
  • Because of the quality and service provided by the reputable companies, there is strong consumer loyalty to their products.
  • By lowering their prices, established businesses show resistance.

• Small number of sellers: The key characteristic of an oligopoly situation is the extremely limited number of sellers who trade in a homogeneous or differentiated product. It indicates that the price and output of the market can be influenced by the pricing and output policies of a single supplier. Each company has a sizable market share, which allows it to change his output and have a discernible impact on market activity.

• Excessive Expenditure on Advertisement: It is well known that oligopolistic enterprises produce close substitutes and are dependent on one another. Each company is required to maintain its current price. The only methods left for boosting sales are advertising and changes or improvements to the product's quality and design. Each business invests a lot in advertising. It is crucial in determining how the firm's product demand functions. Therefore, the main goal of advertising is to make the firm's demand curve more right-handed and less elastic. This will eliminate the threat of a price war and allow the company to sell more output at the same price or perhaps at a higher price. Instead of decreasing prices, each company uses advertising to try to take over the markets of the competition. Oligopoly allows for effective product differentiation among competing enterprises. Advertising is the sole method used. Advertising is one way that each business seeks to draw customers to its unique brand name, even though each business's product may be similar to those of other businesses in the same sector. Advertising is typically used in conjunction with differences in the quality and design of certain products to set one company's product apart from another. Similar to advertising, quality variety has the same goal. The demand curve needs to be moved to the right and made less elastic as the main goal.

• Group behavior: The analysis of group behavior is a key aspect of oligopoly. The assumption is that the behavior of the business firms in the scenarios of perfect competition, monopoly, and monopolistic competition is to maximize profits. It might not be true that he acted in a way that maximized his profits. As a collective, the businesses in an oligopoly are interconnected.

• Elements of monopoly: In an oligopolistic environment, some monopoly characteristics exist. Each company in an oligopoly with product differentiation controls a sizable portion of the market by creating a distinctive product. In this situation, it monopolizes its market and sets the price and output.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan