Characteristics and Features of Oligopoly (6 Answers)

In this article we will discuss about the characteristics and features of oligopoly.

Answer 1. Characteristics of Oligopoly:

The main characteristics of an oligopolistic market can be discussed as follows:

1. No. of Firms or Sellers:

One of the basic features of oligopolistic market structure is the presence of only a fewer firms. If the number of firms is restricted to only two, it is termed as duopoly. The size of firms may however vary from small to very large.

That is, there may be large firms dominating the market and, at the same time, smaller firms playing a relatively insignificant role. It is also possible that all the firms in an oligopolistic market may be of almost equal strength. Irrespective of all this, each one will keep a watch over the activities of other firms in the industry.

2. Nature of Products:

The oligopolistic firms may offer identical or differentiated products but the cross elasticity of demand across them is always high. It implies that the buyers can replace product of one firm from another, if so desired, easily.

3. Barriers to Entry:

Under this form of market structure, firms act so as to maintain their market share or dominance over the market. As such entry of potential rivals is usually a costly and difficult preposition. There may be different kinds of hurdles for a new firm attempting to enter in such a market.

4. Interdependence and Market Strategy:

Given that an oligopolistic industry is characterize by the presence of only a few firms, each firm has to take into account the potential reaction of its rivals when making its own decisions. Firms are therefore interdependent and not independent as in the case of perfect competition or monopolistic competition.

McConnel in this regard, observed that oligopoly is a market situation in which number of firms in an industry is so small that each must consider the reaction of rivals in formulating its price policy.

For example, if a firm plans to increase its market share by reducing price, it has to take into account the possibility that its close rivals may retaliate by a deeper cut in their respective prices. As such, its market share may fall rather than to rise.

Similarly, firms have to anticipate the likely action a rival may take in a given situation and has to keep itself ready with a range of possible options to counter them. In a way, decisions of the firms are inter­woven and at times have to be analyzed at the level of group rather than a firm.

Oligopolistic firms thus have to make critical strategic decisions all the time whether to compete with the rivals or collude with them. In other words, firms constantly struggle for their share in the market.

In this background, appropriate and timely strategic inputs are extremely important for firms. Towards this, an understanding of the game theory and the Prisoner’s Dilemma is found to be of considerable help to the interdependent firms.

5. Market Leadership:

The oligopoly may also be characterized by the leadership of a dominant firm while all other firms follow the leader with regard to price and other matters. However, if no single firm is in such a commanding position, two or three of firms may collectively play the role of market leader. In case all the firms are more or less equally powerful such a leadership may not arise.

In nutshell, though the market leadership is a commonly visible feature of oligopoly, it is not at all a necessary condition. An oligopoly can function even without a market leader.

6. An Indeterminate Demand and Price Rigidity:

An oligopolistic firm cannot construct its demand curve for sure since market response to a change in price by a firm will significantly depend upon the rivals’ reaction. This makes a firm’s demand as indeterminate. The demand curve of an oligopolistic firm can at best be represented by a kinked demand curve reflecting upon considerable price rigidity. It is also marked by a high level of uncertainty.

However, if the firms ignore interdependence, a standard demand curve showing inverse price quantity relationship can be established. Many models of price determination, such as Cournot, are developed on such an assumption.

7. Selling Cost:

Similar to monopolistic competition, the oligopolistic firms too, heavily relies on the selling cost which includes advertisements, discount schemes, celebrity endorsement and so on. All these are part of their non-price market competition strategies.

Given that the price rigidity is a strong feature of oligopoly, through such non-price measures only the firms ensure that their respective market shares are maintained. Since all the firms in the market adopt such instruments, though to a varying extent, it may not lead to any significant rise in market share of any of them.

In a way, this is the cost firms pay to hold their position in the market. As such, selling practices are termed as life and death matters (Baumol) for firms under an oligopolistic market struc­ture.

Answer 2. Features of Oligopoly:

The following prominent features of oligopoly will enable us to distinguish oligopoly easily from other market situations such as perfect competitions, monopoly etc.:

(i) First, every firm under oligopoly has to be conscious of the reactions of the rivals. After all there are only a few firms and what one firm does will definitely influence the others.

As the number of firms is few, any change in output produced by one firm will have a direct effect on the other who naturally, retaliates by changing their own prices, output, products etc. Each firm will have to estimate, as best as it can, the nature of its rival’s reactions to its product, price and output policies. This is not so under perfect competition and monopoly.

(ii) Secondly, the oligopoly is characterised by indeterminateness. A firm does not know for certain whether its decisions regarding price and output will affect its competitors favourably or adversely. It does not know whether its competitors will approve or disapprove of its decisions and in what way, their reactions will be known. Hence the oligopoly firm’s demand curve for the product is clearly indeterminate since the traditional assumption of “other things being equal” does not apply here.

(iii) Oligopoly firms may show Conflicting attitudes to one another. On the one side, they may appear to realise the disadvantage of competition and rivalry and may work out some policy of collusion or they may continuously come in conflict with one another as each is interested in maximising its share of profits. One result of this conflict is the uncertainty in the minds of sellers.

(iv) Oligopoly firms resort to various aggressive or defensive marketing methods to increase their share of the market or to prevent a decline in their share of market. They resort to extensive advertisement and sales promotion. In fact there is competitive advertisement and sales promotion between them. Aggressive sales promotion by some provokes others to do the same.

(v) An oligopoly seller has some monopoly power over the product it produces (brand, name patent etc.) but it does not acquire monopoly control of the market. This is the basic difference between oligopoly and monopoly.

At the same time, oligopoly restricts competition, as there are only a few sellers, under perfect competition, the number of sellers is too many. Besides, the oligopoly producer has to be fully conscious of the reactions of his rivals. But the firm under perfect competition receives the price from the market and does not bother what the rivals think or act.

Answer 3. Characteristics of Oligopoly:

The distinguishing characteristics of oligopoly are briefly explained below:

1. Small Number of Number:

The number of firms in an oligopoly market is small where each firm controls an important proportion of the total supply. The effect of a change in the price or output decision of one firm upon the sales of its rival firms is noticeable and significant. When a firm takes an action, its rivals will, in all probability, react to it.

2. Indeterminate Demand Curve:

The demand curve of an individual firm under oligopoly is indeterminate because it depends upon the uncertain reactions of its rivals.

3. Barriers to Entry:

Unlike firms under monopolistic competition, there are various barriers to the entry of new firms. These are similar to those under monopoly. The size of the barriers, however, will vary from industry to industry. In some cases entry is relatively easy, whereas in other is virtually impossible. Entry of new firms into oligopoly market is difficult. It is neither free nor barred.

4. Interdependence:

The most distinctive feature of an oligopoly industry is that sellers must recognize their interdependence. The action of one seller may affect another and thus cause that seller to respond in ways that will affect the first seller. But oligopolists are likely to deal with this interdependence in difference ways, depending on the specific nature of the industry.

In some case, most actions of competitors will be ignored. In other situations, a price war may occur in response to a seemingly innocuous price change. Many factor, such as industry maturity, nature of the product, and methods of doing business, can affect the way firms respond to actions of rivals.

An oligopolist never knows exactly how his rivals will react to a price or output change that he himself makes. The number of firms being small, each seller knows his competitors in each market area and has to consider the possible reactions of his competitors to his own output and price policies. The smaller the number of firms, the higher will be interdependence between them. The reactions of rivals are generally immediate and strong and can vary in the short and long – run perspectives.

5. Price Rigidity and Non- Price Competition:

Oligopoly markets are characterized by rigid price. Once a price comes to prevail, it continues for years as such in spite of change in costs and demand. Firms tend to stick to the established price and limit their competitive effort to non-price competition i.e., changes in the design and advertising of the product. While maintaining quoted prices constant, firms attempt to improve their position in the market through various types of concessions to the customers, free delivery, guarantee for some time, repair facilities, some kind of gifts with the product etc. A major part of the competition is in the form of product differentiation and selling activity.

6. Existence of Non-profit Motives:

Due to indeterminacy of the individual firm’s demand (AR) and marginal revenue curves, oligopoly firms may not aim at maximization of profits.

Modern theories of oligopoly consider the following alternative objectives of the firm:

(a) Sales maximization with profit constraint.

(b) Fair rate of profit and long-run stability.

(c) Limiting new entry.

(d) Maximization of the marginal utility function.

(e) Achieving satisfactory: profits, sales etc.

(f) Maximization of joint profits rather than individual profits.

It is impossible, therefore, to predict the effect on a firm’s sales of, say, a change in its price without firms making some assumptions about the reactions of other firms. Different assumptions will yield different predictions. For this reason there is no single generally accepted theory of oligopoly. Firms may react differently and unpredictably.

Answer 4. Characteristics of Oligopoly:

The following are the salient features of an oligopoly market structure:

(1) A Few Sellers:

Under oligopoly market there are few sellers of a commodity. Each seller controls a major part of the total supply in the market and by his activities other sellers are affected and he is in a position to influence the price of the product in the market.

(2) Homogeneous and Differentiated Products:

Under the oligopoly sellers may sell homogeneous or differentiated products. On the basis of these products oligopoly may be called pure- oligopoly or oligopoly with product differentiation.

(3) Interdependence:

All the firms under oligopoly are interdependent. The policies of an individual seller affect the policies of other sellers of the product because these products are close substitutes. Production and price policies are taken into consideration while formulating these policies by each producer or seller in the market.

(4) Advertisement and Sales Promotion Costs:

Under oligopoly the interdependency of producers or sellers and the advertisement and sales promotion costs play important role. By spending on these activities the seller will be in a position to attract more and more customers and boost his sales in comparison to his competitors who are spending less on these activities. Other competitors are also forced to spend on these activities in order to keep themselves in the market.

(5) Cut-Throat Competition:

All these firms or sellers have cut-throat competition under the oligopoly market structure. Due to existence of such competition sellers form their cartel.

(6) Restrictions on the Entry and Exit of Firms:

Under this type of market entry and exit of firm is difficult because of patent rights, trade marks, brands, and preferences. Old firms are unable to leave the industry because of heavy investment in permanent assets.

(7) Indeterminate Demand Curve:

In oligopoly market structure the demand curve of a firm is not definite because the behaviour of individual firm is not free and certain. The behaviour of an individual firm depends upon the behaviour of other firms in the market. We cannot draw a demand curve on account of such uncertainty.

(8) Price Rigidity:

Under oligopoly market structure there is price rigidity and price war. Individual firm reacts and acts according to the actions of the other firms and a tug of war starts between them and it leads to cut-throat competition or price war and price rigidity emerges.

(9) Complicated Market Structure:

Oligopoly market is a complicated market. There is always a possibility of rival firms to end rivalry by forming a collusion by which either price is fixed by an experienced firm or by sharing the market and it takes the form of cartels. There may also be non-collusion oligopoly wherein there is no such agreement, etc., and uncertainty prevails regarding the price fixation and output determination. Hence, the market is very complicated one.

Answer 5. Characteristics of Oligopoly:

The salient features of an oligopoly market structure are given below:

(1) A Few Seller of a Commodity:

Oligopoly is a market in which there are a few sellers of a product. It means each seller is selling a large part of the total supply in the market and is in a position to affect the price and activities of other sellers.

(2) Homogeneous Product or Differentiated Product:

Oligopoly market has other salient feature of homogeneous product or differentiated product. When a few producers are producing homogeneous product the market is called pure oligopoly. When a few sellers or producers are selling differentiated product, it is called differentiated oligopoly.

(3) Interdependence:

Under oligopoly market all the firms are mutually interdependent. Production policies of an individual firm affect the policies of other firms because the products produced by these firms are close substitutes. Policies of price and output of an individual firm are studied by others and they adopt new policy to fail the policies of that individual firm. Thus, each firm’s actions depend upon the expected reactions of other firms in response to its own actions under this market situation.

(4) Advertisement and Selling Costs:

Under oligopoly market structure the firms are interdependent. In such a situation, advertisement and selling costs play an important role in the price determination. If an individual firm is spending a lot on advertisement and sales promotions and other firm is not spending naturally the first firm will attract more of customers and will boost its sales in the market.

In order to survive in the market advertisement and sales promotion tactics are resorted. Professor Baumol has also emphasised on this characteristic of oligopoly market saying “under oligopoly advertising can become a life and death matter.”

(5) Cut-Throat Competition:

Under this market structure there is a cut-throat competition among the rival firms. Each individual firm wants to retaliate its price on the basis of actions and reactions of the other firms in the market. There is a struggle for existence among the rival groups and sometimes it leads to formation of monopoly organisation under this market structure.

(6) Restrictions on the Entry and Exit of Firms:

Under oligopoly market structure there are restrictions on the entry of firms. These restrictions are in the form of patent rights, copyright, trade mark, etc. At the same time, heavy investment on permanent assets also do not allow old firms to leave the industry.

(7) Indeterminateness of Demand Curve:

Under oligopoly the behaviour of individual firm is not independent and certain. It depends on the behaviour of other rival groups. It creates atmosphere of uncertainty for all the firms. The demand curve is indeterminate because of mutual interdependence of the firms and actions and reactions of an individual firm affect other firms as well.

(8) Price Rigidity and Price War:

Another salient feature of an oligopoly market is the existence of price rigidity and price war. Product differentiation leads to possibility of price rigidity in the market. Price remains on a particular level and it is called price rigidity. If an individual firm wants to adopt a price cut policy the other firm will retaliate in reaction and a situation of price war starts in which no firm is benefited.

Answer 6. Features of Oligopoly:

The main features of oligopoly are elaborated as follows:

1. Few Firms:

Under oligopoly, there are few large firms. The exact number of firms is not defined. Each firm produces a significant portion of the total output. There exists strict rivalry among different firms and each firm try to control both prices and volume of production to overcome each other.

2. Interdependence:

Under oligopoly firms are interdependent. Interdependence means that actions of one firm affect the actions of other firms. A firm has to consider the action and reaction of the rival firms while determining its price and output levels. Any change in output or price by one firm evokes reaction from other firms operating in the oligopoly market.

3. Non-Price Competition:

Firms in an oligopoly are in a situation to influence the prices. However, they try to avoid price competition for the fear of price war. Firms prefer non-price competition instead of price competition.

4. Barriers to Entry of Firms:

The main reason for few firms under oligopoly is the barriers, which stop entry of new firms into the industry.

5. Role of Selling Costs:

Various sales promotion techniques are used to promote sales of the product. Advertisement is essential and common under oligopoly. A firm under oligopoly relies more on non-price competition.

6. Group Behaviour:

There is complete interdependence among different firms in an oligopoly. Therefore price and output decisions of a particular firm directly influence the competing firms. Instead of independent price and output strategy, oligopoly firms prefer group decisions that will protect the interest of all the firms.

7. Nature of the Product:

Under oligopoly firms may produce homogeneous or differentiated product. If the firms in an oligopoly produce a homogeneous product, the industry is called a pure or perfect oligopoly. On the other hand, if the firms produce a differentiated product, the industry is called differentiated or imperfect oligopoly.

8. Indeterminate Demand Curve:

The exact behaviour pattern of a producer in an oligopoly cannot be determined with certainty. So, demand curve faced by an oligopolist is indeterminate (uncertain), any alteration in price by one firm may lead to alteration in prices by the rival firms. So, demand curve keeps on shifting and it is indeterminate.