OLIGOPOLY

By:- Pankaj. M
Muttu. B
 I N T R O D U C T I O N

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.
Meaning Of Oligopoly

In an Oligopolistic market the firms may be producing either

homogenous products or may be having differentiation in a
given line of production.
Characteristics of oligopoly
1. 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
 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.

 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
 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 the
business behavior of other Oligopolists in the industry and
designs his moves on the basis of some assumptions of their
behavior .
 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 firms

it is termed as Open Oligopoly, and if entry is strictly
restricted it is termed as Closed Oligopoly.
 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.
 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.

 TYPES OF OLIGOPOLY
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.

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
 Contd……
Collusive Oligopoly:- oligopoly in which two or more than

two firms are making an agreement or determination of price

and output.
Supply is curtailed so that the price does not go low.
 Contd…
 Non collusive oligopoly:-That oligopoly in which two or more firms

are making an independent decision about their price and output

determination, keeping in view the reaction of other firms operating
in the market.
 One firm’s action effects other firm’s profit

 The response is to be kept under considered during the competition

analysis because say if the supply by all the firms exceeds demand
the price would go down and adversely affect all the firms in the
Kinked Demand Curve
Model

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.
Kinked Demand Curve Under Oligopoly
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 follow him and
accordingly lower their prices, whereas if he raises the price above the
prevailing level, his competitors will not follow his increase in price”
Criticisms Of Kinked
Demand theory

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.

 Contd…
2. 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.
3. The kinked demand Oligopoly theory does not apply to oligopoly
cases 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 Sweezy’s 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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