What is an 'Oligopoly'

Oligopoly is a market structure in which a small number of firms have the large majority
of market share. An oligopoly is similar to a monopoly, except that rather than one firm, two
or more firms dominate the market. There is no precise upper limit to the number of firms in
an oligopoly, but the number must be low enough that the actions of one firm significantly
impact and influence the others.

Features of oligopoly

1. Few firms

Under oligopoly, there are few large firms. Each firm produces a significant portion of the
total output. There exists severe competition among different firms and each firm try to
manipulate both prices and volume of production to outsmart each other.

2. Interdependence:

Firms under oligopoly are interdependent. Interdependence means that actions of one firm
affect the actions of other firms. A firm considers the action and reaction of the rival firms
while determining its price and output levels.

3. Non-Price Competition:

Under oligopoly, firms are in a position to influence the prices. However, they try to avoid
price competition for the fear of price war. They follow the policy of price rigidity.

4. Barriers to Entry of Firms:

The main reason for few firms under oligopoly is the barriers, which prevent entry of new
firms into the industry. Patents, requirement of large capital, control over crucial raw
materials, etc, are some of the reasons, which prevent new firms from entering into industry.

5. Role of Selling Costs:

Due to severe competition and interdependence of the firms, various sales promotion
techniques are used to promote sales of the product. Advertisement is in full swing under
oligopoly, and many a times advertisement can become a matter of life-and-death. A firm
under oligopoly relies more on non-price competition.

6. Group Behaviour:

Under oligopoly, there complete interdependence among different firms. So, price and output
decisions of a particular firm directly influence the competing firms. Instead of independent
price and output strategy, oligopoly firms prefer group decisions that will protect the interest
of all the firms.
 7. Nature of the Product:

The firms under oligopoly may produce homogeneous or differentiated product.

8. Indeterminate Demand Curve:

Under oligopoly, the exact behavior pattern of a producer cannot be determined with
certainty. So, demand curve faced by an oligopolist is indeterminate (uncertain). As firms are
inter-dependent, a firm cannot ignore the reaction of the rival firms.

Types of Oligopoly

1. Pure or Perfect Oligopoly

2. Imperfect or Differentiated Oligopoly
3. Collusive Oligopoly
4. Non-collusive Oligopoly

Models used in Olygopoly

There is no single model describing the operation of an oligopolistic market. The variety and
complexity of the models exist because you can have two to 10 firms competing on the basis
of price, quantity, technological innovations, marketing, and reputation. Fortunately, there are
a series of simplified models that attempt to describe market behavior by considering certain
circumstances. Those are,

A. Cournots Duopoly Model:

A model of oligopoly was first of all put forward by Cournota French economist, in 1838. C.
In Cournot model it is assumed that an oligopolist thinks that his rival will keep their output
fixed regardless of what he might do. That is, each oligopolist does not take into account the
possible reactions of his rivals in response to his actions. Assumptions under this model are,
it is a duopoly with homogeneous products with an assumption of zero cost of production or
model can be presented when cost of production is positive. But the market demand for the
product is assumed to be linear, that is, market demand curve facing the two producers is a
straight line. And In other words, for determining the output to be produced, he will not take
into account reactions of his rival in response to his variation in output and thus decides its
level of output independently.

In real world this can be explained by taking into

account the Cocacola and Pepsi market. Both are
homogeneous since they are coming under beverage
market and both are having linear demand curves and if
coca cola increases its price, it will increase the price
without thinking about Pepsi. And Pepsi will remain constant without reacting to cocacola.
 B. Bertrands Duopoly Model:

According to Betrand, there was no limit to the fall in price since each producer can always
lower the price by underbidding the other and increasing his supply of output until the price
becomes equal to his unit cost of production. There are some important differences in
assumptions of Bertrand and Cournots models of duopoly. In Bertrands model, producers
do not produce any output and then sell whatever price it can bring in. Instead, the producers
first set the price of the product and then produce the output which is demanded at that price.
Thus, in Bertrands model adjusting variable is price and not output.

C. Sweezys kinked demand curve model

According to this model, each firm faces a demand curve kinked at the existing price. The
conjectural assumptions of the model are; if the firm raises its price above the current existing
price, competitors will not follow and the acting firm will lose market share and second if a
firm lowers prices below the existing price then their competitors will follow to retain their
market share and the firm's output will increase only marginally.

In real world examples,

India

The petroleum and gas industry is dominated by Indian Oil, Bharat Petroleum,
Hindustan Petroleum, Reliance Petroleum, and Tata Power.
Most of the telecommunication in India is dominated by Airtel, Vodafone India,
Idea Cellular, Reliance Communications, as well as Tata Teleservices and Tata
Sky.

Australia

Most media outlets are owned either by News Corporation, Time Warner, or by
Fairfax Media
Grocery retailing is dominated by Coles Group and Woolworths
Banking is dominated by ANZ, Westpac, NAB, and Commonwealth Bank.
Fixed line telecommunications products in Australia are primarily delivered by
Telstra, Optus or increasingly NBN Co.

Canada

Five companies dominate the banking industry: Royal Bank of Canada, Toronto
Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial
Bank of Commerce
Rogers Communications, Bell Canada, Telus, and Shaw Communications
dominate the internet service provider market:
 Husky Energy, Imperial Oil, Nexen, Shell Canada, Suncor Energy, Syncrude,
and Repsol Oil & Gas Canada dominate the oil and gas sector
Torstar and Postmedia Network dominate the newspaper industry
Bell Media Radio, Newcap Radio, Rogers Media, and Corus Entertainment
dominate the English-language radio industry
Loblaw Companies, Metro Inc., and Sobeys control the supermarket industry.

European Union

The VHF Data Link market as air-ground part of aeronautical communications is

controlled by ARINC and SITA,

United Kingdom

Five banks (Barclays, Halifax, HSBC, Lloyds TSB and Natwest) dominate the UK
banking sector,
Four companies (Tesco, Sainsbury's, Asda and Morrisons) share 74.4% of the grocery
market.
The detergent market is dominated by two players, Unilever and Procter & Gamble.

United States

Healthcare insurance in the United States consists of very few insurance companies
controlling major market share in most states. For example, Anthem and Kaiser
Permanente.
Transcontinental freight lines are vastly controlled by two railroads: Union Pacific
Railroad and BNSF Railroad.

Worldwide

The accountancy market is dominated by Price Waterhouse Coopers, KPMG,

Deloitte Touche Tohmatsu, and Ernst & Young .
Three leading food processing companies, Kraft Foods, PepsiCo and Nestl,
together achieve a large proportion of global processed food sales. Boeing and Airbus
have a duopoly over the airliner market.
General Electric, Pratt and Whitney and Rolls-Royce plc own more than 50% of
the market share in the airliner engine market.
Three credit rating agencies ,Standard & Poor's, Moody's, and Fitch Group.
dominate their market and extend their crucial importance into the financial sector.
Nestl, The Hershey Company and Mars, Incorporated together make most of the
confectionery made worldwide.
Intel and AMD are the only two major players in desktop CPU market worldwide.
Microsoft, Sony, Valve, and Nintendo dominates the video game platform market.
 D. Edgeworth Duopoly Model:

The Edgeworth duopoly model, also known as Edgeworth

solution, was developed by Francis Y. Edgeworth. It is a
duopoly model similar to the duopoly model developed by
Joseph Bertrand, in which two firms producing the same
good compete in terms of prices. Edgeworths model
presents a slight modification as it also includes constraints
in the production capacity of the firms. In this market
structure, firms have two potential options, to collude or
not.

As per the real world example, laugh and shell gas industry can be taken. Because here both
the firms are producing the same good and have to compete in price. Shell was the first
mover and later on laugh gas came to the market and there was a competition in the market
with price. Currently litro gas has became the largest marketing segment in the LP Gas
industry in Sri Lanka.

E. Chamberlins Oligopoly Model:

oligopolists behave quite intelligently as they recognise their interdependence and learn from
the experience when they find that their action in fact causes the rivals to react and adjust
their output level. This realisation of mutual dependence on the part of the oligopolists leads
to the monopoly output being produced jointly and thus charging of the monopoly price

F. Game theory

In an oligopoly, firms are affected not only by their own production decisions, but by the
production decisions of other firms in the market as well. Game theory models situations in
which each actor, when deciding on a course of action, must also consider how others might
respond to that action.

G. Cartel Arrangements

Cartel members cooperate to set industry price and

output.
Game theory indicates that cartels are inherently
unstable. Each individual member has an incentive
to cheat in order to make higher profits in the short
run.
OPEC, the Organization of Petroleum Exporting
Countries, provides an example of a historically
effective cartel.

All these theories are practically using and helpful for managers to take better decisions.