OLIGOPOPLY: FEATURES AND EXAMPLES

What is oligopoly?

Oligopoly, one of the four market structures, refers to when any particular sector of the market is
dominated by the leading few, powerful firms. These firms can control and dictate prices and supply
but have no influence over the market on their own.

A market is said to be oligopolistic only when the leading five or six firms of any sector of the market,
have more than 50% of the shares in the market collectively. Each of these firms have a significant
share in the market and each of their behaviour has an impact on each other.

Kinked Demand Curve in Oligopoly

Since Oligopolists focus on non-price competitions, the behaviour of the firms is influenced by each
other’s decision in regards to price cuts and increases. In Oligopoly, Firms want to increase, if not,
secure their shares in order to maintain their dominancy in the market. If a firm – Firm A, increases
the price of their product - A, the rest of the firms make no changes to their price and the demand
for A decreases thus, reducing the revenue and market shares of Firm A. Now if Firm A reduces the
price of product A instead, then the rest of the firms follow course and reduce the prices of their
products. In this case, demand for product A does not increase drastically with drastic decrease in its
price because the price for other products now lie in the same price range as product A. Hence, in
Oligopoly, price tends to be rigid in order to avoid a price war.

Features of Oligopoly:

High Barriers to Entry: In Oligopoly, the barriers for new entrants into the market is quite high as
leading firms have control over resources, price and production, making it difficult for new firms to
survive. Barriers to overcome include high capital requirements, licensing, patents, market demand,
economies of scale, limit-pricing and brand loyalty which is a significant barrier to overcome since
other firms have a loyal customer base and beating that is a huge challenge for new firms. As a result
of these barriers to entry, oligopolies are able to enjoy super normal profits due to limited
competition.

More Efficient: The firms benefit from high market shares as well as economies to scale – they are
able to produce at a low cost. If a market has a high fixed cost, new competitors will have to spend
millions on factories and infrastructure thus, increasing costs for existing firms declining the benefits
received for economies of scale. Hence, for such markets, like the automobile industry, are better
served under Oligopolistic structure

Interdependence of Firms/Group Behaviour: Any action a firm takes in an oligopolistic market will
influence the behaviour of its competitors. In an oligopoly, only few of the leading firms of any
sector of the market have significant shares over the market, thus, the decisions they make have an
effect on each other. Under Game Theory, it is referred to as, ‘Prisoner’s Dilemma’. The firms here
keep in mind the action and reaction of their competitors when making decisions. For example, if
Firm A, in an oligopoly, comes up with an advertising campaign on a big scale or launches a new
design that is eye catching to the market, it is definitely going to provoke countermoves from the
rival firms in that given market. Similarly, say that Samsung reduces the price of its Galaxy Note by
$150, then MI will strongly follow course. Here, Samsung does not benefit much with the reduction
in its price since MI lies in the similar price range as well and the demand for both products remains
similar compared to before. All the more reason why oligopolists settle for price rigidity.

Few Firms with Large Market Share & Each Firm Has Little Market Power in Its Own Right: Regardless
of the number of sellers in the market, if the top five leading companies own more than 50% of the
market shares, the market is classified as Oligopolistic. This also implies that these companies own a
significant number of shares in market For example, the market shares in the Cold Drink Industry in
2016, stated that Maaza was leading with 29.7% of the market shares followed by Bisleri with 24.6%,
Sprite with 20.4%, Frooti with 19.8% and Slice with 18.1% of the market shares. These were the top
leading companies in the Cold Drink industry in 2016. Together, the power over the market is
concentrated among the top leading companies but as individual companies in their own rights, they
cannot influence the market singlehandedly. Although the decisions of a single leading firm
influences the decisions of the rest, the power of that decision is not influential enough to the whole
market

Nature of the Product: In Oligopoly, the product of the firms are either heterogenous or
homogenous, thus forming the base for two types of Oligopolies – pure and imperfect.
Heterogenous products have significant attributes which make it difficult to substitute and includes
items like cosmetics, computers, and organic food. Here, factors other than price are to be
considered. Homogenous products are similar to each other and can be substituted with the other
such as oil products, natural gas, steel, cement, etc. For such products, price is the deciding factor.

Differentiated Products: Oligopolists strive to improve in areas of product quality and product
uniqueness. Although products of two firms may be similar, there must be something that
distinguishes each of them namely, the unique selling proposition or USP of the firms in Oligopoly.

Non-Price Competition: Firms do not stress on price competition in order to avoid price wars, hence,
they use non-price tactics and strategies to compete with each other such as advertising, offering
customer benefits, after sales services, warranties and customer rewards for loyalty, sponsorship,
contributing promotion schemes and differentiating their product. Firms are more concerned with
building brand recognition and influencing demand by creating a vast loyal customer base and using
strategies, so as to not lose customers to a supposed price war.

Role of Selling Cost: Since firms do not compete with each other on price grounds, most of their
expenditure goes into advertisements, sales promotions and marketing of their product and the cost
that goes into all this is called the selling cost. It is the selling cost that helps firms, in an Oligopoly, to
sell their products in the market as there is already severe competition and interdependence
amongst themselves.

Advertising: Advertisements is a crucial tool for vigilant Oligopolists to monitor other firms and come
up with various ways to capture a large number of consumers in the market or counteract against
company rivals. One firm could start an aggressive advertising campaign and the rest of the firms
resist its defensive advertising. ‘

Higher Price than Perfect Competition: Usually in perfect competition, the prices are just above the
marginal cost, leaving the firms with not so much of a profit but, in Oligopoly, due to competition
only among the leading few, the prices are way above the marginal cost thus, leaving the firms with
huge profits. If a firm decides to reduce its price, the rest of the firms in the respective Oligopoly will
follow suit thus, leading to lower profits. Hence, prices are maintained to a higher value by the
leading few in the Oligopoly market. Taking this characteristic into consideration, sometimes it is
difficult to identify collusion and the natural state of oligopolistic competition – Whether the firms
collude and work together to keep higher prices and profits or are they keeping the high prices out
of the fear of lower profits.

Uncertainty: Oligopolists are independent and want to act independent when it com es to choosing
their own strategy and are interdependent on each other for their decision making, since they have
no complete knowledge of each other’s strategies. This leads to uncertainty in the market.

No Unique Pattern of Pricing Behaviour: In Oligopoly, due to rivalry amongst firms stemming from
interdependences, firms tend to get conflicted between two situations – independency and the need
to rule out uncertainty. Primarily, firms want to act independent and gain maximum profits and will
act accordingly to the price-output levels. The other situation being collusion – to work together
through a formal agreement or tacit to fix a price. Considering these points, it is safe to conclude
that the pricing behaviour in Oligopoly is unpredictable and nowhere near unique.

Indeterminateness of the Demand Graph: Since there is huge interdependence and uncertainty as to
how rival firms react to the changes in price, the demand graph for an Oligopolistic market is
indeterminate – difficult or impossible to determine.