Oligopoly – Features and Types
What Is Oligopoly?
The term oligopoly contains two words: “Oligi” means little and “Polein” means sell. Oligopoly is known as – competition among few. This means that this market has few sellers. The few sellers in this market influence the behavior of other firms, and each seller is influenced by the behavior of other firms. Markets include products that are homogeneous or differentiated.
Several companies (Maruti, Tata, Hyundai, Ford, Honda, etc.) dominate the automotive industry in India. Switching from one company (e.g. Tata) to one of its vehicles (e.g. Indica) will result in the other company (e.g. Maruti, Hyundai, etc.) making appropriate changes to their respective models.
The main characteristics of an oligopoly are as follows:
There are several big companies under this type of market. However, the number of companies is not determined with certainty. Each company produces a portion of the total production. There is competition between different companies. Each company tries to change the price and production volume to outsmart each other. The number of companies is so small that the actions of each company involve competing companies. Therefore, each company closely monitors the activities of competing companies.
Companies in this market are interdependent. Interdependence means that the actions of one firm influence the actions of another. A change in the production or price of one firm triggers a reaction from another firm.
In this market, companies can influence costs. The company has a pricing policy. Price stability refers to a situation in which prices remain unchanged regardless of changes in demand and other conditions. When a company tries to reduce its value, competitors respond by cutting prices. However, if they tried to raise prices, other companies would not. This will result in the loss of consumers for companies that want to add value. Therefore, firms prefer non-price wars over price wars.
Barriers to Business Entry:
Barriers prevent the newest companies in the industry from entering this market. Patents, huge capital requirements, control over important raw materials, etc. prevent new firms from entering the industry. Only companies capable of overcoming these barriers enter. This allows the company to make unusual profits at the end of the day.
Sellers use various advertising techniques to promote the sale of goods due to intense competition.
In this market there is complete interdependence between different companies. So decisions about a particular firm’s prices and production have a direct impact on competing firms. Oligopolistic firms prefer group solutions to independent pricing and production strategies. He represents the interests of various other companies.
In the case of oligopoly, it is difficult to determine the exact behavior of the manufacturer. In an oligopoly, the demand curve is infinite. Because businesses are interdependent, businesses cannot ignore how they respond to competition. Any change in the price of one company can cause a change in the price of a competing company. This shifts the indeterminate demand curve even further.
Pure or perfect oligopoly:
Firms that produce homogeneous products represent pure or complete oligopolies, but perfect oligopolies are almost non-existent. The cement, aluminium and steel industries, however, achieve a pure oligopoly.
Imperfect or differentiated oligopoly:
Firms that produce differentiated products form a differentiated or imperfect oligopoly. For example cars, cigarettes or soft drinks. The goods produced by different companies have their own characteristics, but they are all close substitutes for each other.
Firms that work together to determine price and performance form a collusive or cooperative oligopoly.
As the name suggests, this market and collusive oligopoly are the opposite. That is, companies compete with each other to determine price and performance.
Companies try to avoid competition and cooperate. Therefore, they avoid revealing their pricing strategy to their customers.
One approach is for companies to set their prices by mutual agreement instead of letting market forces set the price. The second approach is for the company to choose a price leader. The price leader sets prices and other companies follow the market leader pricing strategy.
Duopoly and duopoly examples:
The term duopoly contains two words: “duo” which means two and “polein” which means to sell. This is the type of market that has exactly two sellers. The market works on the assumption that the products sold by the two companies are homogeneous and cannot be replaced by anything.
Example of a duopoly:
Soft drink market with Pepsi and Coca-Cola as market leaders – Pepsi and Coca-Cola are homogeneous products and perfectly substitute for each other. They have the same taste, color and purpose. The profit potential of both companies remains the same.
Commercial aircraft market with Airbus and Boeing on top – These two brands in the aircraft market account for 99% of mass aircraft orders. There are no other major competitors in the market and the goals of both companies are the same.
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