Meaning and Features of Oligopoly Notes
Meaning and Features of Oligopoly
Oligopoly
is also known as competition among the few. The term oligopoly is derived from
two Greek words:
· ‘oligo’ means a few
· ‘poly’ means seller
When
the sellers are a few, each produces a considerable fraction of the total
output of the industry and can have a noticeable effect on market conditions. Thus,
Oligopoly is a market situation where the number of sellers is so small that
every seller has a perceptible effect on others and influences the market. Examples of oligopoly are cement, cold drink, automobiles,
steel industry, etc.
When oligopoly firms sell a homogeneous product, then it is called
Pure
or homogeneous Oligopoly. For example, industries selling cement, steel, petrol,
cooking gas, etc are industries characterized by Pure or homogeneous
Oligopoly.
On the other hand, when products of the few sellers or firms are
differentiated but close substitutes of each other, then. It is differentiated
or heterogeneous Oligopoly. Automobiles, televisions, refrigerators, soft
drinks, computers, etc are the examples of differentiated or heterogeneous
Oligopoly.
Features of Oligopoly:
The following are the main features of an oligopolistic market.
(1) Few
Sellers: It is also known as competition among the few. The number of
sellers is so small and the market share of each firm is so large that a single
firm can have a noticeable effect on market conditions. Each seller has direct
and ascertainable influences upon every other seller in the industry.
(2) Interdependence: It is the unique feature of an
oligopolistic market that the policies of every producer directly affect each
other because the products are good substitutes for one another. They have high
cross elasticities of demand. Therefore, pricing and output decisions of one firm
are considered by the other firms. As a result, when any one of them undertakes
any measure to promote its sale, it directly affects other firms and they also
immediately react.
(3) Non-price
competition: It is often seen in oligopoly that firms, instead of
price-competition take up non-price competition in order to increase their
sales and profits. Under non-price, competition, they make use of publicity and
selling techniques for increasing the sales of their products. oligopolist
firms spend much in advertisement. As pointed out by Professor Baumol:
“Under
oligopoly advertising can become a life-and-death matter."
For
example, if all oligopolists continue to spend a lot on advertising their
products and one seller does not match up with them, he will find his customers
gradually going in for his rivals' product. If, on the other hand, one
oligopolist advertises his product, others have to follow him to keep up their
sales.
(5) Demand Curve: In oligopoly, it is not easy to trace the
demand curve for the product of an oligopolist. An individual seller's demand
curve in oligopoly is most uncertain because a seller's price or output move
will lead to unpredictable reactions on price-output policies of his rivals. In
an oligopolistic market when a firm reduces the price to promote its sale, it
affects other firms also. Hence, as a reaction, rival firms also start to
reduce their prices. In this situation, the first firm may not be able to
increase its sale as much as it had assumed of at the time of reducing the
price. Thus, the demand curve (or average revenue curve) faced by an
oligopolistic firm is indeterminate.
(6) No Unique Pattern of Pricing Behavior: Firms under oligopoly realize the disadvantage of the competition and rivalry and desire to unite together to maximize their profits. All rivals enter into a formal agreement with regard to price-output changes. It leads to a sort of monopoly within oligopoly. They may even recognize one seller as a leader at whose initiative all the other sellers raise or lower the price. On the other hand, firms guided by individualistic considerations may continuously come in clash with one another. This creates uncertainty in the market. Given these conflicting attitudes, it is not possible to predict any unique pattern of pricing behavior in oligopoly markets. It is difficult to say anything with certainty in oligopoly whether firms would work as a group through mutual agreement or they would act as independent units.
(7) Lack
of uniformity: There is the lack of uniformity in the
size of firms under oligopoly. Firms differ considerably in size. Some may be
small, others very large.
(8) Elements of monopoly and competition both: under monopoly, a firm has some monopoly power over the product as the market share of each firm is sufficiently large to dominate the market. But monopoly power enjoyed by the firm will be limited by the extent of competition.
(9)
Barriers in Entry of firms: There are many barriers for new firms to enter
into the oligopoly Industry. The most important barriers are government licenses, patents, access to
expensive and complex technology, and strategic actions by existing firms
designed to discourage new firms. Additional sources of barriers to entry often
result from government regulation favoring existing firms making it difficult
for new firms to enter the market.
Comments
Post a Comment