The word "Oligopoly" comes from two Greek words: oligo, which means "few" and polein, which means "sellers".
An oligopoly is a form of market wherein the market is dominated by small number of sellers. These sellers are called oligopolists.
A lot of industries in the developed economies are of oligopolistic form of market.
Real life close examples of oligopoly markets are:
(a) Credit Card Market in which a few players like Visa, Master Card and American Express dominate the whole market.
(b) Soft Drink Market in which Pepsi & Coca Cola dominate the whole market.
Following are the features of oligopoly:
(1) Few big sellers: Oligopoly market structure consists of few firms. Few firms mean either firms are few in 'number or few big firms produce most of output of the industry i.e, a few big firms control the market.
(2) Cut throat competition: In this form of market, the number of firms is less and the degree of competition between these firms is very high. Most of firms avoid price competition due to the fear of price-war. They focus on non-price competition through huge advertisement expenses and other brand building exercises. The firms don't compete on the price of product. They try to differentiate their product using steps like better brand building, good after sales services, etc.
(3) Interdependence between firms: Firms under this form of market are interdependent on each other for decision making. Under Oligopoly market, there are only a few big firms. Hence, each individual firm have significant share of the industry. Hence price and output decision of each firm has a significant effect on all other firms. For example, if one particular firm starts doing heavy advertising then other firms may also start thinking about doing the same to protect their market share. Thus one firm's decision impacts other firms in the market too.
(4) High advertisement and selling cost: To promote its product and take advantage over rival firms every firm has to incur high cost of advertisement. This helps in increasing 'brand loyalty' of the customers and improves market share of the firm.
(5) Price Rigidity : It refers to that price of a oligopoly firm which can't be changed in short run. The reason behind the price rigidity is cut throat competition.
If any firm increases price of its product then other competing firms may not respond in the same manner or may not increase price of their product. In such a scenario, firm will have to suffer huge decrease in demand of its product as customers would start buying competitor's products.
If a firm decreases price of its product to increase sales then other competing firms will most likely respond in the same manner or will most likely decrease price of their product, So firm will have no benefit in demand of its product due to decrease in the price of the product.
Also Read - Perfect Competition
Following are different types of Oligopoly:
1. Perfect Oligopoly: Oligopoly market in which all the firms produces homogenous (identical) products is known as Perfect Oligopoly. Steel, Cement and alluminum producing industries are close examples of perfect oligopoly.
2. Imperfect Oligopoly: Oligopoly market in which all the firms produces differentiated products is known as Imperfect or Differentiated Oligopoly. Passenger Cars industry and Soft Drinks industry are close examples of Imperfect Oligopoly. The goods produced by different firms in these industries have their own distinguishing characteristics and yet all of them are close substitutes of each other.
3. Collusive Oligopoly: Oligopoly market in which all the firms have agreed to avoid competition through a mutual agreement regarding price and output decision is known as collusive Oligopoly. The agreement may be either open or secret.
4. Non-collusive Oligopoly: Oligopoly market in which all the firms have not agreed to avoid competition regarding price and output decision is known as non-collusive Oligopoly.
Also refer - Monopolistic Competition
An oligopoly is a form of market wherein the market is dominated by small number of sellers. These sellers are called oligopolists.
A lot of industries in the developed economies are of oligopolistic form of market.
Real life close examples of oligopoly markets are:
(a) Credit Card Market in which a few players like Visa, Master Card and American Express dominate the whole market.
(b) Soft Drink Market in which Pepsi & Coca Cola dominate the whole market.
Following are the features of oligopoly:
(1) Few big sellers: Oligopoly market structure consists of few firms. Few firms mean either firms are few in 'number or few big firms produce most of output of the industry i.e, a few big firms control the market.
(2) Cut throat competition: In this form of market, the number of firms is less and the degree of competition between these firms is very high. Most of firms avoid price competition due to the fear of price-war. They focus on non-price competition through huge advertisement expenses and other brand building exercises. The firms don't compete on the price of product. They try to differentiate their product using steps like better brand building, good after sales services, etc.
(3) Interdependence between firms: Firms under this form of market are interdependent on each other for decision making. Under Oligopoly market, there are only a few big firms. Hence, each individual firm have significant share of the industry. Hence price and output decision of each firm has a significant effect on all other firms. For example, if one particular firm starts doing heavy advertising then other firms may also start thinking about doing the same to protect their market share. Thus one firm's decision impacts other firms in the market too.
(4) High advertisement and selling cost: To promote its product and take advantage over rival firms every firm has to incur high cost of advertisement. This helps in increasing 'brand loyalty' of the customers and improves market share of the firm.
(5) Price Rigidity : It refers to that price of a oligopoly firm which can't be changed in short run. The reason behind the price rigidity is cut throat competition.
If any firm increases price of its product then other competing firms may not respond in the same manner or may not increase price of their product. In such a scenario, firm will have to suffer huge decrease in demand of its product as customers would start buying competitor's products.
If a firm decreases price of its product to increase sales then other competing firms will most likely respond in the same manner or will most likely decrease price of their product, So firm will have no benefit in demand of its product due to decrease in the price of the product.
Also Read - Perfect Competition
Following are different types of Oligopoly:
1. Perfect Oligopoly: Oligopoly market in which all the firms produces homogenous (identical) products is known as Perfect Oligopoly. Steel, Cement and alluminum producing industries are close examples of perfect oligopoly.
2. Imperfect Oligopoly: Oligopoly market in which all the firms produces differentiated products is known as Imperfect or Differentiated Oligopoly. Passenger Cars industry and Soft Drinks industry are close examples of Imperfect Oligopoly. The goods produced by different firms in these industries have their own distinguishing characteristics and yet all of them are close substitutes of each other.
3. Collusive Oligopoly: Oligopoly market in which all the firms have agreed to avoid competition through a mutual agreement regarding price and output decision is known as collusive Oligopoly. The agreement may be either open or secret.
4. Non-collusive Oligopoly: Oligopoly market in which all the firms have not agreed to avoid competition regarding price and output decision is known as non-collusive Oligopoly.
Also refer - Monopolistic Competition
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