- Oligopoly is a market situation in which there are few producers of a commodity
- It is an industry characterized by a few firms.
Oligopsony, the opposite of oligopoly, is a market situation characterized by a few buyers of a commodity.
An oligopoly situation may arise if industry comprising of many small firms is dominated by a few large enterprises; and they supply a very large proportion of the industry’s output. Thus their actions have much effect on the market. This is the prevailing situation in automobile and petroleum industries. They are dominated by a few large companies that supply over 60% of total output.
Characteristics of oligopoly
Oligopoly has the following important features:
- Few firms: The firms in the industry are quite few.
- Heterogeneous goods: The goods they produce and sell are not identical. They are differentiated from one another with aid of trade name, trade mark, colouring and packaging.
- Impeded entry: Entry into the industry is restricted in various forms, like licence and large capital requirement (economies of scale).
- Non-fixed prices: The branded goods attract different prices. And individual firms administer (adjust) their prices.
- Perfect knowledge: They have a fairly good knowledge of the market situation because of the fewness of the number of firms.
- Preferential treatment: They give various forms of special treatment to their customers based on the degree of relationship.
- Non-price competition: They always avoid price war; but they are deeply involved in non-price competition, like persuasive advertising, sales promotion, publicity, etc.
- Inter-dependence: The few firms are inter-dependent; and they always co-operate among themselves in order to avoid price war.
- Strategic behaviour: They adopt strategic behaviour in the sales of their products. They always predict the possible reaction of their competitors in the market before adopting any market policy especially price cut and increased output.
- Faced with both elastic and inelastic supply: A single firm’s supply is elastic if it raises its price; and it is inelastic if it reduces its price. That is, the firm’s total revenue falls if it either raises the price or reduces it. Why, Factually this is the major factor that enhances their inter-dependence and mutual cooperation. Oligopolistic firm is faced with highly elastic supply curve; while the entire industry has less elastic supply curve. The other structural or market conditions of oligopoly are also similar to those of monopolistic competition.
Causes of oligopoly
1) Economies of scale
One of the major factors leading to the existence of oligopoly is presence of economies of large-scale production undertaken by only very large firms. It makes a few firms to dominate the market. Thus a small number of firms can produce a very large output which forms a lion share of the market.
2) Natural oligopoly
- Climatic and soil conditions: The existence of a few firms in an industry-may be due to natural factors. The rubber industry, for example, comprises a few firms. The number of firms can’t be appreciably increased because of natural barriers, like climatic and soil conditions. Other examples are cocoa and timber industries.
- Mineral deposits: Certain minerals are only produced by a few countries; and the number of producers can’t remarkably increased. They include gold, coal, iron ore, petroleum, etc. These factors lead to the existence of only a few firms in an industry.
3) limited market
The market for certain goods and services have limited capacity. It can’t absorb (take) a large number firms. Thus the number of firms in the industry are restricted to a few number. Among them are aircraft and silicon ship industries; others are aeronautical engineering and wrist-watch repairing service industries.
4) Statutory oligopoly
The existence of a few firms in an industry or a few sellers ina country may be due to the act of parliament. The parliament or a government of a country may make a law to restrict the number of firms or sellers to a few numbers in a particular industry.
5) Strategic behaviour
An industry may consist of many firms. But the adoption of strategic behaviour, like acquisition, combination and predatory practices, can reduce the number of firms to a few. And this coupled with entry restriction make the industry to retain the image of oligopolistic market structure.
The strategic behaviour include the following:
- Cooperation rather than competition.
- Inter-dependence in economic decisionmaking.
- Practices of either openly or secretly co-operate among themselves.
- Proliferation or multiplicity of brands.
- Artificial restriction of entry into the industry.
Types of oligopoly
There are two types of oligopoly: Perfect and Imperfect Oligopolies.
- Perfect oligopoly: It is a market situation in which there are few producers of homogeneous products which are sold at the same price. Examples of perfect oligopoly include production of cement, steel, sugar, petroleum, etc. The products are homogeneous (alike); the producers are few and the products are sold almost at the same price.
- Imperfect oligopoly: It is a market situation characterised by a few firms that produce differentiated products which are sold at different prices. Good examples of firms under imperfect oligopoly are those of cigarette, automobile etc. The producers of cigarettes are few and they make different brands of cigarettes, like Three Ring, Excel, Gold Leaf, Benson and Hedges, etc ., which are sold at different prices. The producers of automobile make various brands of vehicles as well as different models of their products; e.g ., Peugeot, Toyota Nissan, Volkswagen, Honda, Volvo, Mercedes Benz, etc. They are sold at different prices but they are close substitutes.
Duopoly is a market situation characterized by two firms or two producers of a commodity. Perfect duopoly refers to only two producers of homogeneous (identical) product; while imperfect duopoly means only two producers of heterogeneous products or branded goods.
It is a single buyer of a commodity or service. The buyer is called Monopsonist. A good example of monoposonist is Railway corporation. It is the only buyer of railroad tracks, train and its spare parts.