Oligopoly - Features and Types - CSEET / CA Foundation
Oligopoly – Features and Types – CSEET / CA Foundation
Oligopoly – Features and Types
what is oligopoly
The term oligopoly comprises two words: ‘Oligi’ means few and ‘Polein’ means to sell. Oligopoly is famously known as – Competition among the few. That implies this market has only a couple of sellers. The few sellers in this market influence the behaviour of other firms, and each seller gets influenced by the behaviour of fellow firms. The market comprises homogeneous or differentiated products.
Example of Oligopoly
Few firms (Maruti, Tata, Hyundai, Ford, Honda, etc.) dominate the automobile industry in India. A change by any firm (say, Tata) in any of its vehicles (say, Indica) will make other firms (say, Maruti, Hyundai, etc.) make changes accordingly in their respective models.
Features of Oligopoly
The main features of oligopoly are as follows:
There are few large firms under this market form. However, the number of firms is not defined precisely. Each firm produces a portion of the entire output. Competition exists among various firms. Every firm attempts to change prices and volume of production to outsmart one another. The number of firms is so less that the actions of each firm affect the rival firms. So, every firm keeps an in-depth watch on the activities of rival firms.
Firms under this market are interdependent. Interdependence means the actions of one firm affects the actions of other firms. A change in output or price by one firm evokes a reaction from other firms.
Under this market, firms can influence the costs. Firms follow the policy of price rigidity. Price rigidity refers to a situation during which price remains fixed regardless of changes in demand and other conditions. If a firm tries to scale back the worth, the rivals also will react by reducing their prices. However, if it tries to increase the price, other firms would not do so. It would cause a loss of consumers for the firm, which intends to boost its worth. So, firms prefer a non-price war rather than a price war.
Barriers to Entry of Firms
Barriers prevent the entry of the latest firms into the industry under this market. Patents, a requirement of huge capital, control over crucial raw materials, etc., prevent new firms from getting into the industry. Only those firms enter which are in a position to cross these barriers. As a result, firms can earn abnormal profits at the end of the day.
Sellers use various advertisement techniques to promote merchandise sales due to severe competition.
There is complete interdependence among different firms under this market. So, the price and output decisions of a specific firm directly influence the competing firms. Oligopoly firms prefer group decisions rather than independent price and output strategies. It protects the interest of various other firms.
Under oligopoly, it is hard to determine the precise behaviour pattern of a producer. In the case of oligopoly, the demand curve is indeterminate. As firms are interdependent, a firm cannot ignore the reaction of the firms in competition. Any change in price by one firm may cause a change in price by the competing firms. So, the indeterminable demand curve keeps on shifting.
Types of Oligopoly
Pure or Perfect Oligopoly Firms producing homogeneous products make up a pure or perfect oligopoly. However, perfect oligopolies hardly exist. Still, cement, aluminium and steel industries achieve pure oligopoly.
Imperfect or Differentiated Oligopoly Firms producing differentiated products make up a differentiated or imperfect oligopoly. For instance, passenger cars, cigarettes or soft drinks. The goods produced by different firms have their distinguishing characteristics, yet all of them are close substitutes for each other.
Collusive Oligopoly Firms cooperating for determining price and output make a collusive or cooperative oligopoly.
Non-collusive Oligopoly As the name suggests, this market and collusive oligopoly are opposites. It implies that firms compete with each other for price determination and output.
Stability of Oligopolies
Firms agree to avoid competition and cooperate. Therefore, they avoid making their price-fixing strategies known to customers.
One approach is for firms to set their prices based on mutual consent rather than letting market forces decide prices for them. The second approach is for firms to choose a price leader. The price leader determines prices, and other firms follow the leader’s pricing strategies.
Duopoly and Example of Duopoly
The term duopoly comprises two words: ‘Duo’ meaning two and ‘Polein’ meaning to sell. It is a type of market having exactly two sellers. The market functions with the assumption that the product sold by the two firms is homogeneous, and there is no substitute for it.
Example of Duopoly
The soft drink market with Pepsi and Coca-Cola as leaders – Pepsi and coca cola are both homogeneous products and are perfect substitutes of each other. They have a similar taste, color and purpose. The potential profits for both firms stays the same.
The commercial large jet aircraft market with Airbus and Boeing as leaders – These two brands in the aircraft market make up 99% of large plane orders. There are no other major competitors in the market and the purpose of both companies is the same.
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