10 characteristics of the OLIGOPOLY

He oligopoly as a market structure it is clearly different from other market forms. An oligopoly is an industry dominated by a few firms. In this market, there are some companies that sell homogeneous or differentiated products.

Furthermore, since there are few sellers in the market, each seller influences the behavior of the other companies and is influenced by other companies.

Oligopoly is either perfect or imperfect/differentiated. In India, some examples of an oligopolistic market are automobiles, cement, steel, aluminum, etc.

  • Barriers to business entry: Since there is great competition in an oligopolistic industry, there are no barriers to entering or exiting it. However, in the long run, there are some types of barriers to entry that tend to prevent new companies from entering the industry. These might be:
    1. Economy of scale enjoyed by some large companies;
    2. exclusive patents; and licences;
    3. The existence of unused capacity that makes the industry unattractive.
    4. Control over essential and specialized inputs;
    5. High capital requirements due to plant costs, advertising costs, etc. When entry is restricted or blocked by such natural and man-made barriers, the oligopolistic industry can make supernormal profits in the long run.
  • Indeterminacy of the demand curve: In non-oligopolistic market structures, the demand curve facing a firm is determined. However, the interdependence of oligopolists makes it impossible to draw a demand curve for such sellers, except in situations where the form of interdependence is well defined. In actual business operations, the demand curve remains indeterminate. Under oligopoly, a firm can expect at least three different reactions from other sellers when it lowers its prices. This happened for the reason:
    1. Others may keep the prices they had before. In this case, an oligopolist can expect its demand to increase substantially as prices fall.
    2. When one company lowers its price, the other sellers lower their prices much more. Under these circumstances, the demand for the product of the oligopolistic first-mover firm may decline. Therefore, uncertainty under oligopoly is inevitable, and as a result, the demand curve faced by each firm that belongs to the group is necessarily indeterminate.
    3. When one oligopolist lowers its price, the other sellers also lower their prices by an equivalent amount. In this situation, although the demand of the first-mover oligopolist will increase as its price falls, the increase itself would be much less than in the first case.
  • Interdependence: The main characteristic of the oligopoly is the interdependence of the various companies in decision making.

This fact is recognized by all firms in an oligopolistic industry. If a small number of sizeable firms constitute an industry and one of them launches a large-scale advertising campaign or designs a new product model that immediately captures the market, it will surely provoke counter-moves by rival firms in the industry. .

Therefore, the different companies are closely interdependent with each other.

  • Lack of uniformity: Another characteristic of the oligopoly market is the lack of uniformity in the size of the companies. The companies differ considerably in size. Some may be small, others very large. Such a situation is asymmetric. This is very common in the US economy. A symmetrical situation with firms of uniform size is rare.
  • Existence of price stickiness: In an oligopoly situation, each company must adjust to its price. If any firm tries to lower its price, rival firms will retaliate by further lowering their prices. This will lead to a win-win price war situation. On the other hand, if any company increases its price in order to increase its profits; the other rival companies will not follow suit. Therefore, no company would like to reduce the price or increase the price. Price stickiness will take place.

  • No single pattern of price behavior: The rivalry that arises from the interdependence between oligopolists leads to two conflicting motives. Each wants to remain independent and get the maximum benefit possible. To this end, they act and react on the movements of the production of prices with respect to each other, which are a continuous element of uncertainty. On the other hand, motivated again by profit maximization, each seller wants to cooperate with their rivals to reduce or eliminate the element of uncertainty. All rivals come to a tacit or formal agreement regarding changes in price output. It leads to a kind of monopoly within the oligopoly. They may even recognize one seller as a leader at whose initiative all other sellers raise or lower the price. In this case, the individual seller's demand curve is part of the industry's demand curve, and has the elasticity of the latter. Given these conflicting attitudes, it is not possible to predict any single pattern of pricing behavior in oligopoly markets.
  • Advertising: Under oligopoly, a major policy change by one firm is likely to have immediate effects on other firms in the industry. Therefore, rival companies remain vigilant all the time about the moves of the company that takes the lead and makes policy changes. Therefore, advertising is a powerful instrument in the hands of an oligopolist. A company under oligopoly may start an aggressive advertising campaign with the intention of capturing a large part of the market. Other companies in the industry will obviously resist your defensive advertising. Under perfect competition, advertising is unnecessary, whereas a monopolist may find some advertising profitable when his product is new or when there are a large number of potential consumers who have never tried his product before. But according to Professor Baumol, "Under oligopoly, advertising can become a matter of life and death where a company that cannot keep up with its competitors' advertising budget may find its customers diverted to rival products."
  • Identical or differentiated products: Some oligopolistic industries produce identical products, like perfect competition in this sense, while others produce differentiated products, more like monopolistic competition. This feature may seem a bit lame, taking both sides of the product differentiation problem. Actually, he points out that oligopolistic industries generally come in two varieties.
    1. Oligopoly of identical product: This type of oligopoly tends to process raw materials or produce intermediate goods that other industries use as inputs. Notable examples are oil, steel, and aluminum.
    2. Differentiate the oligopoly of the product: This type of oligopoly tends to focus on goods sold for personal consumption. The key is that people have different wants and needs and therefore enjoy variety. Some examples of differentiated oligopolistic industries include automobiles, household detergents, and computers.
  • Group behavior: In oligopoly, the most relevant aspect is the behavior of the group. There may be two companies in the group, or three or five or even fifteen, but not a few hundred. Whatever the number, it is small enough for each company to know that its actions will have some effect on other companies in the group. In contrast, under perfect competition, there are a large number of firms trying to maximize their profits. Similar is the situation under monopolistic competition. Under monopoly, there is only one firm that maximizes profit. Whether considered a monopoly or a competitive market, a company's behavior is generally predictable. In oligopoly, however, this is not possible due to several reasons:
    1. The companies that make up the group may not have a common goal
    2. The group may or may not have a formal or informal organization with accepted rules of conduct.
    3. The group may be dominated by a leader, but other companies in the group may not follow evenly, despite the leader's dominant presence.
  • Competence: This leads to another characteristic of the oligopolistic market, the presence of competition. Since under oligopoly, there are some sellers, a move by one seller immediately affects rivals. Therefore, every seller is always on the alert and closely watches the moves of his rivals in order to have a counter move. This is the true competition, "True competition consists in life of constant struggle, rival against rival, who can only be found under oligopoly."

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ENCICLOPEDIA DE CARACTERÍSTICAS (2023) 10 characteristics of the OLIGOPOLY, en 10caracteristicas.com. https://10caracteristicas.com/en/10-characteristics-of-the-oligopoly/ (Consultado el: 22-09-2023)

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