The Term ´Oligopolyµ has been derived from two Greek words.

¶Oligi· which means few and ¶Polien· means sellers.

Thus Oligopoly is an abridged version of monopolistic

competition . It is a competition among few big sellers each
one of them selling either homogenous or hydrogenous
products.

eller defines Oligopoly as ´Competition among
the fewµ.

In an Oligopolistic market the firms may be

producing either homogenous products or may
be having differentiation in a given line of
production.
Oligopoly refers to a market situation where there r a few
sellers (2 to 10) in a market, selling homogenous or
differentiated products. Oligopoly is often described as
¶Competition among few·.

When the products of a few sellers are homogenous it is known

as ¶Pure Oligopoly· When the products of few sellers are
differentiated , but close substitutes of each other it is
known as ´Differentiated Oligopolyµ .
1.
ew 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. Products
may be differentiated by way of design , trademark or service
=. 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 Elasticities : The cross elasticity of demand for

the products of oligopoly firms is very high. Hence there is
always the fear of retaliation by rivals.
Each firm is conscious about the possible action and reaction of
competitors while making any change in price or output
4. Importance of Advertising and Selling costs : A
direct effect of interdependence of the Oligopolistic firms is
that they have to employ various aggressive and defensive
marketing weapons to gain greater share in the market or to
maintain their share.
Hence, the firms will have to incur a good deal of costs on
advertising and other measures or sales promotion .

irms in Oligopoly market avoid price cutting and try to

compete on non-price basis. This is because if they start
under-cutting one another, a type of price war will emerge
which will drive a few of them out of the market as the
customers will try to buy from the seller who is selling at
the cheapest price.
_. Competition : Competition is unique in an oligopoly
market. It is a constant struggle against rivals.

7. Different size : The size of firm in an oligopoly market. It

is a constant struggle against rivals.

8. Group Behaviour : Each Oligopolist closely watches the

business behaviour of other Oligopolists in the industry and
designs his moves on the basis of some assumptions of their
behaviour .
. Uncertainty : The interdependence of other firms for
one·s own decision creates an atmosphere of uncertainty
about price and output

10. Price Rigidity : In an oligopoly market each firm sticks

to its own price to avoid a possible price war. The price
remains rigid because of constant fear of retaliation from
rivals.
Because of interdependence , an oligopolistic firm cannot
assume that its rival firms will keep their quantities
constant when it makes changes in price or quantity. When
an oligopolistic firm changes its prices, its rival firms would
retaliate and change their prices which in turn would affect
the demand of the former firm.

Oligopoly can be classified into several forms. Some of the

important forms of Oligopoly are as follows
1. Perfect and Imperfect Oligopolies : If the product
of the rival firm are homogenous then it is Perfect
Oligopoly, if the product are differentiated it is Imperfect
Oligopoly.

2. Open and Closed Oligopolies : If entry is open to

new firms it is termed as Open Oligopoly, and if entry is
strictly restricted it is termed as Closed Oligopoly.
=. Collusive Oligopoly : If the firms under oligopoly
market combine together instead of competing it is known
as Collusive Oligopoly. The collusive may take place in the
form of a common agreement or an understanding between
the firms.

4. Partial and
ull Oligopoly : Partial oligopoly is
formed when the dominant firm which is the price leader
and all other firms follow the price of the price leader. If no
firm acts as a price leader then it is called
ull Oligopoly.
Because of interdependence , an oligopolistic firm cannot
assume that its rival firms will keep their quantities
constant when it makes changes in price or quantity. When
an oligopolistic firm changes its prices, its rival firms would
retaliate and change their prices which in turn would affect
the demand of the former firm.

Economists have established a number of price-output models

for Oligopoly market, depending upon the behaviour
pattern of the members of the group. A few important ones
are as follows :
1. Avoidance of Interdependence : Some economists have
assumed that oligopolist firms ignore interdependence . When
interdependence disappears from decision making the demand
curve facing the oligopolist becomes determinate.

2. Price Leadership : Another approach is that the firms in an

Oligopoly would accept one firm as a leader and would follow him
in setting prices. Such a leader firm may be dominant or low-cost
firm producing a very large proportion of the total production and
having a great influence over the market.
=. Price Wars : Some economists assume that
an oligopolist is able to predict the counter
moves of his rivals, and they provide a
determinant solution to the price and output
problem.

4. Game Theory : In the theory of games, the oligopolistic

firms does not guess at it·s rivals reaction pattern, but
calculates the optional moves by rival firms. It calculates
their best possible strategies and in view of that adopts its
policies and counter moves.
4. Non-price competition : Since the oligopolists face the
danger of retaliation in price cut competition, they resort to
non-price competition. This can take the from of
advertising, sales promotion , improvement of the product
etc.

_. Secret Price Concessions : Since an open price cut is

retaliated by rivals, some oligopolists offer secret price
concessions for selected buyers.

rom the above analysis it is clear that there is no single

determinant solution to the price output fixation under
Oligopoly. The fixing of price under oligopoly market
situation is very difficult.
In many oligopolistic industries, prices remain sticky or
inflexible for a long time even though the economic
conditions change. Many explanations have been given for
this price rigidity under Oligopoly and the most population
explanation is the Kinked Demand Curve Hypothesis given
by an American economist Paul Sweezy.
According to the kinked demand curve hypothesis, the demand
curve facing the Oligopolist has a ¶Kink· at the level of the
prevailing price. The kink is formed at the prevailing price
level because the segment of the demand curve above the
prevailing price level is highly elastic and the segment of the
demand curve below the price level is inelastic.
The figure shows a kinked demand curve dD with a kink at
point k. the prevailing price is OP and the firm produces
and sells OQ output. The upper segment dk of the demand
curve dD is relatively elastic and the lower segment kD is
relatively inelastic.

The differences in elasticity's is due to the particular

competitive reaction pattern assumed by kinked demand
curve hypothesis. The assumed pattern is ´Each Oligopolist
believes that if he lowers the price below the prevailing
level, his competitors will follow him and accordingly lower
their prices, whereas if he raises the price above the
prevailing level, his competitors will not follow his increase
in priceµ
Each oligopolist will find himself in such a situation that on
one hand, he expects rivals to match his price cuts very
quickly and on the other hand, he does not expect his rivals
to match his price increase .

Given this expected competitive pattern, each oligopolist will

have a kinked demand curve dD, with the upper segment
dK being relatively elastic and the lower segment kD being
relatively inelastic
1. The oligopoly model provides a theoretical explanation as
to why stable prices exist in oligopolistic industries. But it
takes prevailing prices as given and provides no
justification as to why that price level rather than some
other is the prevailing price
i.e. the kinked demand model can be viewed as incomplete.

2. Stigler had tested the kinked demand curve empirically on

several oligopolies. He found that oligopolistic rivals are
just as likely to follow price increase as price decreases
indicating little support for the kinked demand curve.
=. The kinked demand Oligopoly theory does not apply to
oligopoly cases of price leadership and price cartels.

4. In case of pure oligopoly, the kinked demand curve does not

provide adequate explanation for price rigidity.

4. The explanation of price stability by Sweezy·s kinked demand

curve theory applies to depression periods. In periods of boom
and inflation, when the demand for the products increase,
price is likely to rise rather than remain stable.