Market Structure - Oligopoly

. Oligopoly is a market structure featuring a small number of sellers that together account for a large fraction of market sales. ‘Oligi’ which means few and ‘Polien’ means sellers.The Term “Oligopoly” has been derived from two Greek words.

but close substitutes of each other it is known as “Differentiated Oligopoly” . .• 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 .

.Sources of Oligopoly Factors that give rise to oligopoly are : • Huge capital investment • Economies of scale. • Patent rights • Control over certain raw materials • Merger and takeover.

2. It has a large number of buyers but a few sellers. Homogeneous or Differentiated Product : The Oligopolists produce either homogenous or differentiated products. Oligopoly is a special type of imperfect market. trademark or service . Products may be differentiated by way of design .1. Few Sellers : An oligopoly market is characterized by a few sellers and their number is limited .

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 . The reactions of the rival firms may be difficult to guess. 4. Hence price is indeterminate under Oligopoly. Interdependence : The most important feature of the Oligopoly is the interdependence in decision making of the few firms which comprise the industry.3.

Firms in Oligopoly market avoid price cutting and try to compete on non-price basis. This is because if they start under-cutting one another.5. Hence. the firms incur a good deal of costs on advertising and other measures or sales promotion . . a type of price war will emerge which will drive a few of them out of the market . Importance of Advertising and Selling costs : Oligopolistic firms have to employ various aggressive and defensive marketing weapons to gain greater share in the market or to maintain their share.

7. . It is a constant struggle against rivals. Competition : Competition is unique in an oligopoly market.6. 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 .

.9. The price remains rigid because of constant fear of retaliation from rivals. 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.

• Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players • Prisoners’ dilemma: a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial 10 OLIGOPOLY .Game Theory • Game theory helps us understand oligopoly and other situations where “players” interact and behave strategically.

• The police question each in separate rooms. two suspected bank robbers. – If you both confess.Prisoners’ Dilemma Example • The police have caught Bonnie and Clyde. you go free. each gets 8 years in prison. but only have enough evidence to imprison each for 1 year. OLIGOPOLY 11 . – If you do not confess but your partner implicates you. you get 20 years in prison. offer each the following deal: – If you confess and implicate your partner.

Nash equilibrium: Bonnie’s decision both confess Confess Confess Clyde’s decision Bonnie gets 8 years Clyde gets 8 years Bonnie goes free Remain silent Clyde gets 20 years OLIGOPOLY Remain silent 12 Bonnie gets 20 years Clyde goes free Bonnie gets 1 year Clyde gets 1 year .Prisoners’ Dilemma Example Confessing is the dominant strategy for both players.

• Both would have been better off if both remained silent. each gets 8 years in prison. the logic of self-interest takes over and leads them to confess. OLIGOPOLY 13 . • But even if Bonnie and Clyde had agreed before being caught to remain silent.Prisoners’ Dilemma Example • Outcome: Bonnie and Clyde both confess.

• The prisoners’ dilemma shows how difficult it is for firms to maintain cooperation. The proper scope of these laws is the subject of ongoing controversy. • Policymakers use the antitrust laws to regulate oligopolists’ behavior. even when doing so is in their best interest. depending on the number of firms and how cooperative they are.CONCLUSION • Oligopolies can end up looking like monopolies or like competitive markets. 14 .