Oligopoly: Types and Features
In layman’s language, a Market is a place where the exchange of goods takes place. In other words, a place where the purchase and sale of goods take place is a market. The market is the nervous system of modern economic life where producers and consumers carry out the sale and purchase transactions. The market has a different and wider meaning in Economics, as it does not refer to a specific place. In Economics, a Market is a region where the buyers and sellers do not have to assemble at a specific place for the sale and purchase of goods. Instead, they have to be in contact with each other through any communication means, such as the internet, letter, mail, telephone, etc.
Market refers to the whole region where buyers and sellers of a commodity are in contact with each other to affect the purchase and sale of the commodity.
The number and types of firms operating in the industry and the nature and degree of competition in the market for the goods and services is known as Market Structure. To study and analyze the nature of different forms of market and issues faced by them while buying and selling goods and services, economists have classified the market in different ways. The different forms of market structure are Perfect Competition and Imperfect Competition (Monopoly, Monopolistic Competition, and Oligopoly).
The term oligopoly is derived from ‘oligi’, meaning few and ‘polein’, meaning to sell. A market situation where the number of big sellers of a commodity is less and the number of buyers is more is known as Oligopoly Market. The sellers in the oligopoly market sell differentiated or homogeneous products. As the number of sellers in this market is less, the price and output decision of one seller impacts the price and output decision of other sellers in the market. In other words, the interdependence among the sellers of a commodity is high. For example, luxury car producers like BMW, Audi, Ford, etc., come under Oligopoly Market, as the number of sellers of luxury cars is less and its buyers are more. Sometimes, there are few sellers in the oligopoly market, and every seller gets influenced by other sellers and influences them too, which is also known as ‘competition among the few’.
Types of Oligopoly
1. Pure or Perfect Oligopoly: If the firms in an oligopoly market manufacture homogeneous products, then it is known as a pure or perfect oligopoly. Even though it is rare to find oligopoly firms with homogeneous products, industries like steel, cement, aluminum, etc., come under pure oligopoly.
2. Imperfect or Differentiated Oligopoly: If the firms in an oligopoly market manufacture differentiated products, then it is known as an imperfect or differentiated oligopoly. For example, talcum powders are produced by different firms and have differentiated characteristics, yet all the talcum powders are close substitutes for each other.
3. Collusive Oligopoly: Collusive Oligopoly, also known as Cooperative Oligopoly, is a market where different firms cooperate with each other to determine the output or price, or both price and output of products.
4. Non-Collusive Oligopoly: If the firms in an oligopoly market compete with each other, then it is known as a Non-Collusive Oligopoly.
What is Duopoly?
A special case of oligopoly in which there are two sellers, and it is also assumed that both the firms sell homogeneous products and there is no substitute for the product. For example, Pepsi and Coca-Cola are two firms selling soft drinks, which are homogeneous in nature and do not have a substitute.
Features of Oligopoly
1. Few Firms: There are few firms under an oligopoly market whose number is not exactly defined. But, each of the firms under this market produces a significant part of the total output. Each of the firms in the oligopoly market competes with each other severely and tries to manipulate their product’s price and volume to outsmart each other. Also, the number of firms in the market is so small that the action of one firm affects the rival firms. Therefore, every firm keeps an eye on the actions/activities of other rival firms. For example, the automobile industry in India comes under Oligopoly Market.
2. Non-Price Competition: The firms under an oligopoly market can influence the price of the product; however, they try to avoid such influence as it can start a price war, which none of the firms wants. In other words, if one firm tries to reduce the price of their product, then the other firms will also have to reduce the price, and vice-versa because of which the firm can lose its customers, ultimately intended to increase the price. Therefore, these firms follow the policy of price rigidity, and hence prefer non-price competition. So, to compete with each other, the firms use different methods other than pricing, such as after-sales services, advertising, etc.
Price rigidity is a situation in which the price of the product tends to stay the same or fixed irrespective of the changes in supply and demand of those products.
3. Interdependence: The firms under an oligopoly market are interdependent, which means that the actions of one firm affect the actions of other firms. Every firm in this market considers the actions and reactions of their rival firms before deciding the price and output level of their products. A change in the price or output of one firm changes the reaction of other firms operating in the same market. For example, if Maruti makes any change in the price of its cars, then its rival firms such as Tata, Hyundai, etc., will also have to make respective changes in their activities.
4. Barriers to Entry of Firms: There are only a few firms under oligopoly because of the barriers to the entry of the new firms in this market. The new firms prevent themselves from entering into the oligopoly market because of the large capital requirement, patents requirement, and many other factors. Therefore, the new firms, which can cross these barriers enter the market, which results in earning abnormal profits in the long run.
5. Role of Selling Costs: Selling cost is the cost spent on the advertisement, sales promotion, and marketing of the product. As there is severe competition and interdependence among the firms, they take help of selling costs to sell their product in the market. Therefore, the firms under oligopoly market focus more on their advertisements and other sales promotion techniques. The role of selling costs in the sale of products is more than its role in a monopolistic competition market.
6. Nature of the Product: The firms under oligopoly market may produce differentiated or homogeneous products. The firms producing homogeneous products are known as pure oligopolies. Whereas, the firms producing heterogeneous products are known as imperfect oligopolies.
7. Group Behaviour: The firms under oligopoly market are completely interdependent on each other; therefore, any change in the price and output of one firm influences the other competing firms. Therefore, to avoid price wars, these firms prefer to decide the price of their product by making a group decision so that it can benefit all of these firms.
Group behaviour here means that the firms in this market behave like they are one single firm even though they retain their interdependence on an individual basis.
8. Intermediate Demand Curve: One cannot determine the behaviour pattern of a producer under an oligopoly market with certainty. Therefore, the demand curve of the firms under an oligopoly market is intermediate or uncertain. As the firms in this market are interdependent, an action of one firm severely influences the action of other rival firms. Therefore, the demand curve of an oligopoly market keeps on changing or shifting and is not definite.