Oligopoly Market and Characteristics
Oligopoly Market and Characteristics
Oligopoly Market and Characteristics
Introduction
Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and ‘Polein’ meaning ‘to sell’. An
oligopoly is defined as a market structure with few firms, none of which can keep the others from having
significant influence. An Oligopoly market situation is also called ‘competition among the few’. An oligopoly
is an industry in which a few firms dominate. In this market, a few firms sell homogeneous or differentiated
products. Also, as there are few sellers in the market, every seller influences the behaviour of the other
firms and other firms’ influence. An oligopoly is either perfect or imperfect/differentiated. Some examples
of an oligopolistic market in India are the Telecommunication sector, steel industry etc.
Characteristics of Oligopoly
Now that the Oligopoly definition is clear, it’s time to look at the characteristics of Oligopoly:
Few firms
Under Oligopoly, there are a few large firms, although the exact number of firms is undefined. Also, there
is severe competition since each firm produces a significant portion of the total output.
Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry like
patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into
the industry.
Non-Price Competition
Firms try to avoid price competition due to the fear of price wars in oligopolies and hence depend on non-
price methods like advertising, after-sales services, warranties, etc. This ensures that firms can influence
demand and build brand recognition.
Interdependence
Under Oligopoly, since a few firms hold a significant share in the industry's total output, each firm is affected
by rival firms' price and output decisions. Therefore, there is a lot of interdependence among firms in an
oligopoly. Hence, a firm considers the actions and reactions of its competing firms while determining its
price and output levels.
Selling Costs
Since firms try to avoid price competition and there is a huge interdependence among firms, selling costs
are highly important for competing against rival firms for a larger market share.
No unique pattern of pricing behaviour Under Oligopoly, firms want to act independently and earn
maximum profits on one hand and cooperate with rivals to remove uncertainty on the other hand.
Depending on their motives, situations in real life can vary, making predicting the pattern of pricing
behaviour among firms impossible. The firms can compete or collude with other firms, leading to different
pricing situations.