Sources of Oligopoly
The factors that give rise to oligopoly are broadly the same as those for monopoly. The main sources of oligopoly arc described here briefly.
1. Huge capital investment
Some industries are by nature capital-intensive, e g., manufacturing automobiles, aircraft, ships. TV sets, computers, mobile phones, refrigerators, steel and aluminium goods, etc. Such industries require huge initial investment. Therefore, only those firms which can make huge investment can enter these kinds of industries and survive in the long run. In fact, a huge investment requirement works as a natural barrier to entry to the oligopolistic industries.
2. Economies of scale
By virtue of huge investment and large scale production, the large units enjoy absolute cost advantage due to economies of scale in production, purchase of industrial inputs, market financing, and sales organization. This gives the existing Anns a comparative advantage over new firms in production and price competition. This also works as a deterrent for the entry’ of new Arms.
3. Patent rights to branded product
In case of differentiated oligopoly, firms get their differentiated product patented which gives them an exclusive right to produce and market the patented commodity. This prevents other Arms from producing the patented commodity. Therefore, unless new firms have something new to offer and can match the existing products in respect of quality and cost, they cannot enter the industry . This keeps the number of firms limited.
4. Control of some firms over certain raw materials
Where a few firms acquire control over almost the entire supply of important inputs required to produce a certain commodity, new firms find it extremely difficult to enter the industry. For example, if a few firms acquire the right from the government to import certain raw materials, they have control over the entire input supply .
5. Merger and acquisition
Merger of rival firms or takeover of rival firms by the bigger ones with a view to protecting their joint market share or to put an end to waste of competition has emerged, in modem times as an important factor that gives rise to oligopolies and strengthens the oligopolistic tendency in modern industries. Mergers and takeovers have been one of the main features of recent trend in Indian industries.