Oligopoly

Managerial Economics Notes

Meaning Of Oligopoly

The term oligopoly has been applied to an industry that consists of a few firms, each producing a substantial share of the total output of that industry. This type of market structure is typical of the petroleum industry, the automobile industry, or the iron and steel industry. If the industry consists of only two firms, the term duopoly is used.

Feature of Oligopoly

The main features of oligopoly are the following:

i. A few firms
The industry consists of only a few firms—so few that each produces a relatively large share of the total output of the industry. An oligopolistic industry generally consists of 2 to 15 firms.

ii. Interdependence in pricing decisions
As a consequence of the small number of firms in an oligopolistic industry, the actions taken by any one firm have a large effect on other firms. This interdependence is of crucial importance in understanding the behaviour of firms in oligopolistic industries.

iii. Barriers to entry
There are barriers to entry into an oligopolistic industry. These barriers often include the huge capital investment necessary to establish an oligopolistic firm, and the enormous advertising necessary to capture a worthwhile share of the market.

iv. Identical or differentiated products
Oligopolistic firms may produce identical products or they may produce differentiated products. For example, the cement produced by one firm is similar to that produced by the other firms. The example of differentiated products is automobile industry.

v. Perfect knowledge
Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.

vi. Non-Price Competition
Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition.

vii. Long run profits
Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.

Types of Oligopoly

Oligopoly is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output. Oligopolistic industries can be classified into various ways. Some are following:
1. Perfect or Imperfect Oligopoly
If in an oligopoly market, the firms produce homogeneous products, it is called perfect oligopoly. If the firms produce differentiated products, it is called imperfect oligopoly.

2. Non-collusive or Collusive Oligopoly
If in an oligopoly market, the firms compete with each other, it is called a non-collusive, or non-cooperative oligopoly. If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly, or cooperative oligopoly.

3. Duopoly
When there arc only two firms producing a product, it is called duopoly. It is a special case of oligopoly.