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OLIGOPOLY
By:- Pankaj. M
Muttu. B
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The Term Oligopoly has been derived from two Greek words.
Oligi which means few and Polien means sellers.
Thus Oligopoly is an abridged version of monopolistic
competition . It is a competition among few big sellers each
one of them selling either homogenous or hydrogenous
products.
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In an Oligopolistic market the firms may be producing either
homogenous products or may be having differentiation in a
given line of production.
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Characteristics of oligopoly1. Few Sellers : An oligopoly market
is characterized by a few
sellers and their number is limited . (usually not more than
10) Oligopoly is a special type of imperfect market. It has
a
large number of buyers but a few sellers.
2. Homogeneous or Differentiated Product : The Oligopolists
produce either homogenous or differentiated products.
Products may be differentiated by way of design , trademark
or service
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Contd
3. Interdependence : The most important feature of the
Oligopoly is the interdependence in decision making of the
few firms which comprise the industry.
The reactions of the rival firms may be difficult to guess.
Hence price is indeterminate under Oligopoly.
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Contd
4. High Cross Elasticities : The cross elasticity of demand
for
the products of oligopoly firms is very high. Hence there is
always the fear of retaliation by rivals.
Each firm is conscious about the possible action and
reaction
of competitors while making any change in price or output
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Contd
5. Competition : Competition is unique in an oligopoly market.
It
is a constant struggle against rivals.
6. Different size : The size of firm in an oligopoly market. It
is a
constant struggle against rivals.
7. Group Behaviour: Each Oligopolistic closely watches
thebusiness behavior of other Oligopolists in the industry and
designs his moves on the basis of some assumptions of their
behavior .
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Various forms of oligopoly
1. Perfect and Imperfect Oligopolies : If the product of the
rival firm are homogenous then it is Perfect Oligopoly, if
the
product are differentiated it is Imperfect Oligopoly.
2. Open and Closed Oligopolies : If entry is open to new firmsit
is termed as Open Oligopoly, and if entry is strictly
restricted it is termed as Closed Oligopoly.
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Contd.
3. Collusive Oligopoly : If the firms under oligopoly market
combine together instead of competing it is known as
Collusive Oligopoly. The collusive may take place in the
form of a common agreement or an understanding between
the firms.
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Contd
4. Partial and Full Oligopoly : Partial oligopoly is formed
when
the dominant firm which is the price leader and all other
firms follow the price of the price leader. If no firm acts as
a
price leader then it is called Full Oligopoly.
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TYPES OF OLIGOPOLYy Pure Oligopoly:- When the products of a few
sellers are
homogenous it is known as Pure Oligopoly
Example is of sugar and edible oil manufacturers.
y Differentiated Oligopoly:- When the products of few sellers
are
differentiated , but close substitutes of each other it is known
as
Differentiated Oligopoly .
Example Service shoes have other product lines besides being a
shoe
manufacturer
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Contd
y Collusive Oligopoly:- oligopoly in which two or more than
two firms are making an agreement or determination of price
and output.
y Supply is curtailed so that the price does not go low.
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According to the kinked demand curve hypothesis, the demand
curve facing the Oligopolistic has a Kink at the level of
the
prevailing price. The kink is formed at the prevailing price
level because the segment of the demand curve above the
prevailing price level is highly elastic and the segment of
the
demand curve below the price level is inelastic.
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Kinked Demand Curve Under OligopolyKinked Demand Curve Under
Oligopoly
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The figure shows a kinked demand curve dD with a kink at point
k.
the prevailing price is OP and the firm produces and sells
OQ
output. The upper segment dk of the demand curve dD is
relatively
elastic and the lower segment kD is relatively inelastic.
The differences in elasticity's is due to the particular
competitive
reaction pattern assumed by kinked demand curve hypothesis.
The
assumed pattern is Each Oligopolistic believes that if he
lowers
the price below the prevailing level, his competitors will
followhim and accordingly lower their prices, whereas if he raises
the
price above the prevailing level, his competitors will not
follow
his increase in price
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1. The oligopoly model provides a theoretical explanation as
to
why stable prices exist in oligopolistic industries. But it
takes prevailing prices as given and provides no
justification
as to why that price level rather than some other is the
prevailing price
i.e. the kinked demand model can be viewed as incomplete.
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Contd2. Stigler had tested the kinked demand curve empirically
on
several oligopolies. He found that oligopolistic rivals are just
as
likely to follow price increase as price decreases
indicating
little support for the kinked demand curve.
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3. The kinked demand Oligopoly theory does not apply to
oligopolycases of price leadership and price cartels.
4. In case of pure oligopoly, the kinked demand curve does
not
provide adequate explanation for price rigidity.
5. The explanation of price stability by Sweezys kinked
demand
curve theory applies to depression periods. In periods of
boom
and inflation, when the demand for the products increase, price
is
likely to rise rather than remain stable.
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