OLIGOPOLY

It is an important form of imperfect competition

Oligo means few
Poly means sellers
Oligopoly = Few Sellers
Few sellers have huge market share(i.e.,)total output, price
determination and decision making
They produce both Homogeneous products & Differentiated products
There will be more than two firms and less than twelve firms in this
form of market.
But large number of buyers prevail in the market
It lies between Monopoly and Monopolistic competition
 Types of Oligopoly
• Pure /Perfect Oligopoly :- When the firms
produce homogeneous products
eg:- LPG (consumer c ould not differentiate
between different producer’s products)
. Differentiated/Impure Oligopoly :- When the
firms produce differentiated products
Eg:- Automobiles , Electronic Goods
Consumer products like Baby foods
Vegetable Oil & Soft Drinks
 Definition
• It is the form of market structure in which
there are a few firms selling a product so that
there is intense competition among them.
 Features of Oligopoly(8)
Intense Indeterminate Few Sellers
Competition Demand Curve

Importance of
OLIGOPOLY Interdependence

Selling Cost

Nature of the
Group Behaviour Barriers to Entry Product
 1.Intense Competition
• There are only few firms in the market
• They have a large share in the total market
output
Hence each firm has significant market power
* Since the number of firms is very small any action taken by one firm is
likely to affect the rival firms. Therefore everyone keeps a close
watch on the action of rival firms
Any change in price ,output & product will have a direct effect on rival firms
and they will be ready with counter attack
* Highest form of inter firm competition among the competitors
* An Oligopolist must consider not only the demand for his product
but also the possible moves of other firms in the industry .
 2.Few Sellers
• There are only few sellers in this form of
market
• Sellers ----- Few
• Buyers ----- Many
• Those few firms dominate the market and
enjoy a considerable control over the price of
the product.
 3.Interdependence
Sellers should be very cautious of decision making in
respect of any action taken by the rival firms.
WHY?
Change in price -- promotion scheme - other firms in the
industry have to comply with it to remain in the market.
Hence there is complete interdependence among the sellers
with respect to their price & output policies.
Eg :- If Maruti Udyog offers insurance coverage to its buyers then
Santro is also compelled to make the same offer to its customers.
This is what happening frequently, between Coke and Pepsi
4. Advertising / Importance of Selling Cost

• Sellers’ intention is to reach more and more

customers and compete each other through
various sales promotion. It creates intense
competition among the sellers.
• In order to be in the race, each firm spends
lots of money on promotional activities like
Price Cutting , Discount , Door – Door
campaign and advertisement. (Selling Cost)
 5.Entry Barrier
• Few players in the market, they dominate .
• Barriers are Government License , Patent right,
Large scale production , Cost advantage ,
Price Cutting by the exiting firms, High Capital
requirement for the new entries and Complex
Technology.
Government also favours the existing large
firms, thereby they are acting as a barrier for the
new firms to enter into the market.
 6.Indeterminate Demand Curve
• A demand curve shows the Quantity of Product that a
firm can sell at various prices.
• Other forms of market faces a definite demand curve
and they can ignore the reaction of rival firms.
• But an Oligopolist cannot ignore the action of its rival
firms , because they are all interdependent to each
other.
• Therefore demand curve faced by an Oligopolist keeps
on shifting . It is not definite , it is indeterminate.
 7. Group Behaviour
• Two types of conflicting attitudes are found in this form of
market.
* They realize the disadvantage of mutual competition and
they desire to combine to maximize their joint profits . This
leads to the formation of collusion.(an illegal co-operation)
*The desire to maximize one individual’s profit lead to
conflict and antagonism(feeling of hatred).The firms come into
clash with one another on the distribution and allocation of
market.
*Thus collusive trend as well as competitive trend would
prevail in Oligopoly Market.
 8.Nature of the Product
• Firms produce Homogeneous products are
termed as Pure Oligopoly
• Firms produce Differentiated products are
termed as Impure/Differentiated Oligopoly
 Reading Practice
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different forms of market(refer Page no.178)
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