Definition of Oligopoly Market
Oligopoly Market characterized by few sellers, selling the homogeneous or differentiated products. In other words, the Oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of the product. Under the Oligopoly market, a firm either produces:
- Homogeneous product: The firms producing the homogeneous products are called as Pure or Perfect Oligopoly. It is found in the producers of industrial products such as aluminum, copper, steel, zinc, iron, etc.
- Heterogeneous Product: The firms producing the heterogeneous products are called as Imperfect or Differentiated Oligopoly. Such type of Oligopoly is found in the producers of consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc.
Features of Oligopoly Market
- Few Sellers: Under the Oligopoly market, the sellers are few, and the customers are many. Few firms dominating the market enjoys a considerable control over the price of the product.
- Interdependence: it is one of the most important features of an Oligopoly market, wherein, the seller has to be cautious with respect to any action taken by the competing firms. Since there are few sellers in the market, if any firm makes the change in the price or promotional scheme, all other firms in the industry have to comply with it, to remain in the competition.Thus, every firm remains alert to the actions of others and plan their counterattack beforehand, to escape the turmoil. Hence, there is a complete interdependence among the sellers with respect to their price-output policies.
- Advertising: Under Oligopoly market, every firm advertises their products on a frequent basis, with the intention to reach more and more customers and increase their customer base.This is due to the advertising that makes the competition intense.If any firm does a lot of advertisement while the other remained silent, then he will observe that his customers are going to that firm who is continuously promoting its product. Thus, in order to be in the race, each firm spends lots of money on advertisement activities.
- Competition: It is genuine that with a few players in the market, there will be an intense competition among the sellers. Any move taken by the firm will have a considerable impact on its rivals. Thus, every seller keeps an eye over its rival and be ready with the counterattack.
- Entry and Exit Barriers: The firms can easily exit the industry whenever it wants, but has to face certain barriers to entering into it. These barriers could be Government license, Patent, large firm’s economies of scale, high capital requirement, complex technology, etc. Also, sometimes the government regulations favor the existing large firms, thereby acting as a barrier for the new entrants.
- Lack of Uniformity: There is a lack of uniformity among the firms in terms of their size, some are big, and some are small.
- Existence of Price Rigidity: In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its price, the rival firms will retaliate by a higher reduction in their prices. This will lead to a situation of price war which benefits none. On the other hand, if any firm increases its price with a view to increase its profits; the other rival firms will not follow the same. Hence, no firm would like to reduce the price or to increase the price. The price rigidity will take place.
Types of Oligopoly Market
- Open Vs Closed Oligopoly: This classification is made on the basis of freedom to enter into the new industry. An open Oligopoly is the market situation wherein firm can enter into the industry any time it wants, whereas, in the case of a closed Oligopoly, there are certain restrictions that act as a barrier for a new firm to enter into the industry.
- Partial Vs Full Oligopoly: This classification is done on the basis of price leadership. The partial Oligopoly refers to the market situation, wherein one large firm dominates the market and is looked upon as a price leader. Whereas in full Oligopoly, the price leadership is conspicuous by its absence.
- Perfect Vs Imperfect Oligopoly: This classification is made on the basis of product differentiation. The Oligopoly is perfect or pure when the firms deal in the homogeneous products. Whereas the Oligopoly is said to be imperfect, when the firms deal in heterogeneous products, i.e. products that are close but are not perfect substitutes.
- Syndicated Vs Organized Oligopoly: This classification is done on the basis of a degree of coordination found among the firms. When the firms come together and sell their products with the common interest is called as a Syndicate Oligopoly. Whereas, in the case of an Organized Oligopoly, the firms have a central association for fixing the prices, outputs, and quotas.
- Collusive Vs Non-Collusive Oligopoly: This classification is made on the basis of agreement or understanding between the firms. In Collusive Oligopoly, instead of competing with each other, the firms come together and with the consensus of all fixes the price and the outputs. Whereas in the case of a non-collusive Oligopoly, there is a lack of understanding among the firms and they compete against each other to achieve their respective targets.