Introduction
Oligopoly is a market situation in which there are a few firms
selling homogeneous or differentiated products. It is difficult to pinpoint the
number of firms in the oligopolist market. There may be three” four of five
firms. It is also known as competition among the few. With only a few firms in
the market, the action of one firm is likely to affect the others. An oligopoly
industry produces either a homogeneous product or heterogeneous products. The
former is called pure or perfect oligopoly and the latter is called imperfect
or differentiated oligopoly. Pure oligopoly is found primarily among producers
of aluminium, cement, copper, steel, electricity, etc. Differentiated oligopoly
is found among producers of such consumer goods as automobiles, cigarettes,
soaps & detergents, TVs, rubber tyres, refrigerators, etc.
Features of Oligopoly
1.
Profit maximization conditions:
An oligopoly maximizes profits by producing where marginal revenue equals
marginal costs.
2.
Ability to set price: Oligopolies
are price setters rather than price takers.
3.
Entry and exit: Barriers to entry
are high. The most important barriers are economies of scale, patents, access
to expensive and complex technology, and strategic actions by incumbent firms
designed to discourage or destroy nascent firms.
4.
Number of firms: "Few"
– a "handful" of sellers. There are so few firms that the actions of
one firm can influence the actions of the other firms.
5.
Long run profits: Oligopolies can
retain long run abnormal profits. High barriers of entry prevent sideline firms
from entering market to capture excess profits.
6.
Product differentiation: Product
may be homogeneous (steel) or differentiated (automobiles).
7.
Perfect knowledge: Assumptions
about perfect knowledge vary but the knowledge of various economic actors can
be generally described as selective. Oligopolies have perfect knowledge of
their own cost and demand functions but their inter-firm information may be
incomplete. Buyers have only imperfect knowledge as to price cost and product
quality.
8.
Interdependence: The distinctive
feature of an oligopoly is interdependence. Oligopolies are typically composed
of a few large firms. Each firm is so large that its actions affect market
conditions. Therefore the competing firms will be aware of a firm's market
actions and will respond appropriately. For example, an oligopoly considering a
price reduction may wish to estimate the likelihood that competing firms
greater revenue and market share.
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