Oligopoly

An oligopoly is a market structure where a few large firms dominate the market.

Oligopoly occurs in industries where few but large leading firms dominate the market. Firms
that are part of an oligopolistic market structure can’t prevent other firms from gaining
significant dominance in the market. However, as only a few firms have a significant share of the
market, each firm’s behavior can have an impact on the other

Characteristics of oligopoly
These are the most important characteristics of oligopoly that you should know about:

Firms are interdependent

As there are a few firms that have a relatively large portion of the market share, one firm’s action
impacts other firms. This means that firms are interdependent. There are two main methods
through which a firm can influence the actions of other firms: by setting its price and output.

Product differentiation

When firms don’t compete in terms of prices, they compete by differentiating their products.
Examples of this include the automotive market, where one producer might add specific features
that would help them acquire more customers. Although the car price might be the same, they are
differentiated in terms of the features they have.

High barriers to entry

The market share acquired by the top companies in an industry becomes an obstacle for new
companies to enter the market. The companies in the market use several strategies to keep other
companies from entering the market. For instance, if firms collude, they choose the prices at a
point where new companies can’t sustain them. Other factors such as patents, expensive
technology, and heavy advertising also challenge new entrants to compete.

Uncertainty

While companies in an oligopoly have perfect knowledge of their own business operations, they
do not have complete information about other firms. Although firms are interdependent because
they must consider other firms’ strategies, they are independent when choosing their own
strategy. This brings uncertainty to the market.

Price setters

Oligopolies engage in the practice of price-fixing. Instead of relying on the market price
(dictated by supply and demand), firms set prices collectively and maximize their profits.
Another strategy is to follow a recognized price leader; if the leader increases the price, the
others will follow suit.

Advantages and disadvantages of oligopoly

Advantages of oligopoly

Firstly, firms can gain extreme profits in some cases as they face little to no competition. This
allows firms to charge higher prices and expand their margins. As a result, firms in an oligopoly
have more money to spend on research and development than they would otherwise in a
competitive market. The research and development benefit consumers they develop new drugs,
new products that will solve problems, etc.

Other benefits come from product differentiation, which is a major part of an oligopolistic
market structure. When firms don't compete in terms of prices, they constantly look to make their
product different and better to acquire more customers. As a customer, you will always have
firms trying to find ways to give you better products.

Disadvantages of oligopoly

An oligopolistic market also has many disadvantages. Such disadvantages include high prices,
which often harm consumers, especially those incapables of paying for these high prices.

Additionally, having a high market concentration amongst some firms provides very limited
choices to consumers as the firms may be disincentivized to innovate. Consumers only have a
few firms to choose from.

Another disadvantage comes from high barriers to entering a certain market, preventing new
firms from joining and offering their products, thereby increasing competition and social welfare.

CASE STUDY

Oligopoly model

GLOBAL SCENARIO (During 1980’s)

During 1980’s there were three major players in automobile sector, General Motors, Ford and Chrysler.
In pricing, GM served for decades as the industry's price leader, setting prices in public utility fashion in
order to obtain a predetermined rate of return, with Ford and Chrysler adopting GM's prices as their
own. In some cases there is actual identity in price to the last dollar, in the majority of instances the
companies are within a few dollars of each other.

In one famous example, Ford announced its new prices first, GM followed with a price hike twice that
announced by Ford, to which Ford responded by reraising its prices in line with the higher prices set by
GM--a mutually-interdependent pattern indicating that "conformity to GM's prices is considered more
important to its principal competitor than competitive price advantage." This avoidance of price
competition persisted for decades during 1960’s. The three major producers tend to copy each other's
price moves. One of the players initiated the process by announcing its "preliminary" prices, while the
others would follow by publicly disclosing their "tentative," "anticipated," or "expected" prices.

INDIAN SCENARIO

Price Leadership Modal

On 30 December 1998, Indica the passenger car developed by Telco. The standard petrol car was priced
at Rs 259,000, and standard diesel car at Rs 285,000. Presenting Indica, Ratan Tata, Chairman of Telco,
said, "We started the Indica project with a commitment to develop a car for the Indian market that
could be benchmarked against the world's best in terms of features, looks and performance-and yet
offers a great value proposition. A car designed for India rather than one adapted for India."

Following the TATA Indica announcement on 31 December 1998 Maruti slashed prices to retain lead in
‘middle class dream to own a car a wink away from reality'. Maruti Udyog Limited announced it has
slashed prices by 5-12 per cent of its popular, top-selling models like Zen, Omni and Maruti 800 small
cars. The prices of its largest selling model, Maruti 800, had been reduced by almost Rs 24,000 to Rs
185,000 from Rs 209,000. Maruti's managing Director, conceded that the price-cuts would impact
negatively on Maruti's profit margins. He said ``certainly our profits will go down. But we hope to make
up for this by increased sales volumes.'' A new model, Maruti 800 EX, was launched with coil spring
suspension and radial tyres priced at Rs 209,000.

Seeing all these, in Bombay, Telco's chairman Ratan Tata told the gathering at Indica's launch party:
``Even for those who do not own or buy an Indica, there is good news. We've triggered price drops in
Maruti, and made the car market a friendlier place for the consumer. We have done our level best to
produce the bigger small car, taking into account our concern for him.''
Current Updates
TATA has come up with Rs 1 lakh car. This has created price war once again between leading players in
automobile industry. Ford India managing director and President said Nissan-Renault combine would
develop a $3000 car using India’s “frugal engineering expertise”. Bajaj is also experimenting with the
concept of a small car.

In near future, due to price war, many car companies will come up with cheap cars that will give
competitions to Tata Rs 1 lakh car.

FUTURE OUTLOOK

The automotive industry is witnessing tremendous and unprecedented changes these days. This
industry is slowly and gradually shifting towards Asian countries, mainly because of saturation of
automobile industry in the western world and also due to ASEAN free trade area under which the export
tariffs are very less. The future seems encouraging for this industry in terms of the expected surge in
global demand and upsurge in investments. Several trends such as over-capacity in developed markets,
globalization, technology advances, regulation and environmental consideration, and market
fragmentation and product proliferation will result in the rapid growth of this sector.

CONCLUSION:

Oligopolistic competition can be said to be beneficial as it ensures, that management would keep their
organization innovative and efficient over the long run.

For example: Tata Nano, consolidation happening in steel industry.

Oligopoly also has the tendency to convert the industry into the monopolistic firm because it allows
them to retain a degree of competition without ceding too much control.