OLIGOPOLY MARKET STRUCTURE

This is a market structure characterized by few large seller/form that

supply the whole market. The product they sell may or may not be
differentiated. If it is differentiated, the market structure is called
differentiated oligopoly. The products they sell are differentiated in the
minds of customers by say branding but these products are close
substitutes as is the case with monopolistic market structure/
competition. If the products are identical, the market structure is called
pure or perfect oligopoly. Buyers have little cause for preferring the
product of one producer to that of another (e.g. petroleum products of
different oil companies). Examples of markets under oligopoly include
markets for aluminum processing, glass, petroleum, automobile
assembling etc.

Characteristics
(a)Few sellers in the market
(b)Demand curve of oligopolistic producers is a kinked demand curve as
shown in the diagram below.
In the above diagram, it can be seen that the demand curve is kinked at
point A and AB of the demand curve shows elastic demand situation,
while AC shows an inelastic demand situation. This is because under
normal circumstances if an oligopolistic producer increased the price
above P1 the consumer will respond by cutting down the consumption of
their commodity by large amount and therefore AB of the demand curve
has to show a fairly elastic demand situation. On the other hand, if the
oligopolistic producer decides to reduce his price below P1 other sellers
would also reduce their price such that he would not be able to increase
his sale by a greater proportion hence the portion AC of demand curve
has to show an inelastic demand situation
(c)There is price rigidity in oligopolistic market. This is mainly because
an oligopolistic producer cannot predict the reaction of other producers
in the market in case he raised or lowered the prices.
(d)Because sellers are few sometimes they can come together and form
one organization the aim being to be able to control price fall by
controlling the supply of their commodities in the market. When sellers
come in one organization with the aim of controlling supply we say that
they have formed a cartel organization.
(e)Oligopolistic producers normally try to influence the demand they
face through vigorous advertisement campaign.

EQUILIBRIUM IN OLIGOPOLISTIC FIRM

Due to the kink in the demand curve of the oligopolist, his MR curve is
discontinuous at the level of output corresponding to the kink.
The MR has two segments: segment dR corresponds to the upper part
of the demand curve, while the segment from point 5 corresponds to the
lower part of the kinked-demand curve.
Equilibrium of the firm is defined by the point of the kink because at
any point to the left of the kink MC is below the MR, while to the right
of the kink the MC is larger than the MR. thus total profit is maximized
at the point of the kink.
However, this equilibrium is not necessary defined by the intersection
of the MC and the MR curve. Intersection of the MC with the MR
segment requires abnormal high or abnormally low cost, which are
rather rare in practice. The discontinuity (between raids) of the MR
curve implies that there is a range within which cost may change without
getting the equilibrium and of the firm.
In the figure, as long as MC passes through the segment RS, the firm
maximize its profits by producing and. Thus the kink can explain why
price and output will not change despite changes in cost (within the
range RS defined by the discontinuity of the MR curve).