Oligopoly

By HARSHAD G. GOURI J.

Oligopoly The Term Oligopoly has been derived from two Greek words. Oligi which means few and Polien means sellers. Oligopoly is an abridged version of monopolistic competition . It is a competition among few big sellers each one of them selling either

Oligopoly Feller defines Oligopoly as Competition among the few. In an Oligopolistic market the firms may be producing either homogenous products or may be having differentiation in a given line of production.

Characteristics Of Oligopoly
1. Few Sellers An oligopoly market is characterized by a few sellers and their number is limited . (usually not more than 10) Oligopoly is a special type of imperfect market. It has a large number of buyers but a few sellers. 2.Homogeneous or Differentiated Product The Oligopolists produce either homogenous or differentiated products.

3.Interdependence The most important feature of the Oligopoly is the interdependence in decision making of the few firms which comprise the industry. The reactions of the rival firms may be difficult to guess. Hence price is indeterminate under Oligopoly. 4. High Cross Elasticity The cross elasticity of demand for the products of oligopoly firms is very high. Hence there is always the fear

5. Ability to set price: Oligopolies are price setters rather than price takers. 6. Entry and exit: Barriers to entry are high. Most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms.

7. Number of firms: There are so few firms that the actions of one firm can influence the actions of the other firms. 8. Long run profits: High barriers of entry prevent sideline firms from entering market to capture excess profits.

9. Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). 10.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.

Why are there oligopolies?

Sometime the oligopoly is the result of the same factors that give rise to a monopoly, but in a weaker form. The most important source of oligopoly is probably the existence of economies of scale:

1. If economies of scale are strong, they give rise to a monopoly. 2. If economies of scale are not very strong, they give rise to an oligopoly, there will be comptition among a small number of firms. Example: grocery stores, 2 or 3 in a small town.(the advantage of large scale decreases once the stores are reasonably large)

Characteristics of Market Structures

Market Structure
Characteristics Number of firms Barriers to entry Market power (control over price Type of product Perfect Competition Very large number None None Monopolistic Competition Many Low Some Oligopoly Few High Substantial

Standardized Differentiated Standardized or differentiated

The Kinked Demand Curve

Close interdependence and the limitations it imposes on price and output decisions is a characteristic of oligopoly

The Kinked Demand Curve Confronting an Oligopolist

The shape of the demand curve facing an oligopolist depends on how its rivals responded to a change in the price of its own output. The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

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Demand curve facing oligopolist if rivals match price changes

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Demand curve facing oligopolist if rivals match price cuts but not price hikes 0

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Demand curve facing oligopolist if rivals don't match price changes

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