OLIGOPOLY AND MARKET CONCENTRATION

OLIGOPOLY
Market situation in which each of a few producers affects but does not control the
market. Each producer must consider the effect of a price change on the actions of the
other producers. A cut in price by one may lead to an equal reduction by others, with the
result that each firm will retain approximately the same share of market.
Examples: Oil Companies.
CHARACTERISTICS OF AN OLIGOPOLY
1. INTERDEPENDENCE
There are few interdependent firms that cannot act independently. Firms
operating in an oligopoly market with a few competitors must take the potential
reaction of its closest rivals in to account when making its own decision.

2. BARRIERS TO ENTRY
There are few barriers to entry and exit. Some of these markets require large
economies of scales for firm to be viable. Firms often try to lower their price as much
as possible to deter new entrants. They also heavily advertised and often employ
loyalty programs.

TYPES OF OLIGOPOLY

A. PURE OLIGOPOLY
Here the oligopolists sell practically homogeneous products.

B. DIFFERENTIAL OLIGOPOLY
In such a case, a few firms sell similar but not identical product under the same
conditions.

C. COLLUSIVE OLIGOPOLY
Sellers may make a collusive agreement. One form of open collusive open
agreement is the formation of cartel.

D. NON-COLLUSIVE
Firms behave independently even though they are interdependent in the market