Introductory Economics

Introduction to Oligopoly

Oligopoly:
It represents the presence of a few firms in the market, producing either a homogenous product or products which are close but not perfect substitutes to each other. Oligopoly can be divided into two forms, viz., perfect oligopoly wherein a few firms produce a homogenous product and imperfect oligopoly wherein there are a few firms producing heterogeneous products. The examples are TV, two wheelers, four wheelers, cigarettes, textiles, etc.

Characteristics of oligopoly:
Following are the characteristics of oligopoly:

1. Presence of Few Sellers: an important feature of oligopoly is the presence of few sellers. The product here is homogenous or heterogeneous in nature. Since the number of sellers is few, each firm commands a sizeable market share of a product.

2. Interdependence: Due to few numbers of firms in the industry, no single firm can afford to ignore the reaction of other firms to its actions. Suppose a given firm is contemplating to bring some changes in its price and output policies, it duly considers the counter actions of the other firms. Thus, the fortune of one firm are decided upon by the policies of the other firms.

3. Indeterminate Demand: The interdependence of firms under oligopoly creates uncertain atmosphere. The price and output policies resorted to by a give firm and its consequent sales of other firms can not be estimated with any amount of certainty. Suppose a firm would like to lower the price for increasing sales, the anticipated increase may not take place, for other firms too would have lowered the price by still a higher margin. This reaction of the other firms is a difficult proposition to be assessed. Hence the demand or revenue curve is indeterminate.

4. Conflicting Attitude of Firms: the firms in oligopoly behave as arch rivals and like to be independent to get maximum profit. By their actions and counteractions, they create an atmosphere of uncertainty. Against this action, at times they behave differently by cooperating each other to eliminate uncertainty arising out of mutual competition. By this way they join together for maximizing their profit. Certainly it is a conflicting attitude of the firms reflected by the competition and co-operation.

5. Competition: There is always a battle among the firms in oligopoly. This rivalry continues as long as firm exists in the business.

6. Features of monopoly: Oligopoly is characterized by presence of few firms, product differentiation and a large market share. It enjoys the superiority of a monopoly in the business as a differentiated product produced by oligopolist attracts the consumers rather consumers are more attract to it. The possibilities are plenty for the firms to unite and done the role of monopoly to enjoy the liberties.

7. Price Rigidity: Alongside competition, and monopoly element in oligopoly, price rigidity is another feature. The rivals are more passive for bringing the changes in prices, for such changes may affect the sales and consequently the revenue. The firms are well aware of the fact that any reduction or rise in price leads price war or loss of sales. This impending danger forces them to keep quiet rather than an exception in oligopoly.

8. Lack of Uniformity in the Size of the Firm: Size of the firms in oligopoly differs considerably. Some may be very large, while others very small.

Monopolistic Competition:
In real life, it is monopolistic competitive market that generally exists. It is that situation of the market wherein there are many sellers of the product, but the product of each seller is a bit different from the products of other sellers. This product differentiation manifests itself in trade mark, name of the brand, quality differentiation or in different facilities and services offered to the consumers. There are many examples relating to this kind of market. Firms producing different brands of toothpaste, as Pepsodent, Colgate, Close-up, etc. are operating under monopolistic competition.
As a matter of fact, monopolistic competition is a mid-way situation between perfect competition and monopoly.
Characteristics of monopolistic competition:
Following are the characteristics of monopolistic competition:

1. Large Number of Sellers and Buyers: as under perfect competition, there are large number of buyers and firms. Also the size of each firm under monopolistic competition is small. Each firm has a limited share of the market.

2. Product Differentiation: The distinct feature of monopolistic competition is a product differentiation. Though the number of firms is large, but their products different from one another, in colour, shape, brand, quality, durability, etc. These products are close substitutes. Because of product differentiation, each firm can decide its price policy independently. So that each firm has a partial control over price of its product.

3. Freedom of Entry and Exit of Firms: Firms are free to enter into, or exit from the industry. But new firms have no absolute freedom of entry into industry. They may have to face several difficulties. Products of some firms may be legally patented. New firms can not produce those products. No rival firm can produce or sell a patented item.

4. Selling Cost: Each firm has to spend a lot on the advertisement of its products. In order to sell more units of the product, it gives a wide publicity of its product in newspapers, journals, radio, TV, etc. The expenses on advertisement and publicity are called selling costs.

5. Less Mobility: there is no perfect mobility of factors, goods and services.

6. Lack of Perfect Knowledge: Sellers and buyers of products and owners of factors of production do not have perfect knowledge about the prices of the products and factor services. It is so because due to product differentiation, it is not possible to compare the price of different products. Likewise, factors of production are also not fully aware of the price being paid by different firms for the services of the factors.

7. Non-Price Competition: Another feature of monopolistic competition is that firms may compete with one another without changing the price of their products. Firms compete in attracting potential buyers by offering them, gifts and other services. In short, they compete on other than price front. The consumer develop liking for a particular product. They would buy that very product even if its price is higher than products of other firms.