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Unit-15: Theory of Oligopoly

Notes

Oligopoly cross elasticity of demand of commodities is much higher. Because these items
are near replacement.

15.1 Features of Oligopoly

Features of oligopoly are as follows:
1. Few sellers and many buyers: Oligopoly is that condition of the market in which only few firms have
their influence. For example, in India, four companies Maruti, Hyundai, Cielo and Tata produce 90%
of the small cars. Products produced by oligopolistic firms can be homogeneous or discriminatory.
These firms can influence prices and production with their actions. In Oligopoly, the number of
buyers is very large.
2. Homogeneous or Differentiated Product: In Oligopolistic industry, firms either produce
homogeneous or differentiated products. If the firms produce homogeneous products, like cement or
steel, the industry is known as Pure or Perfect Oligopoly and if the firm is producing differentiated
product, the industry is called as differentiated or imperfect oligopoly.
3. Mutual Interdependence: The interdependence of firms is an important feature of Oligopoly.
Interdependence means that the firms get affected by each others’ prices and production related
decisions. In monopoly and competition, the firms can take their decisions independently and can
work upon them without taking into consideration what effect would that have on other firms or
how would other firms’ reactions affect them. But an Oligopolistic firm cannot take an independent
decision. As a small number of firms compete with each other in Oligopoly, the sales of a firm depend
on the price taken by the firm itself as well as on the price taken by other firms. If a firm reduces its
price, its sales tend to increase but the sales of other firms tend to decrease at the same time. In such
a situation, it is possible that other firms may reduce their prices as well which might decrease the
profit of the first firm. Therefore, a firm must calculate and predict the reaction of other firms as well
as the effect of those reactions, before reducing its prices. The cross elasticity of goods in Oligopoly
is very high as these goods are easily replaceable. To summarize, the Oligopolistic firms have to
keep in mind the competitors’ actions and reactions while deciding upon price and production.
This mutual interdependence of the firms makes the Oligopolistic market different from monopoly,
complete competition, and monopolistic competitor.
4. Lack of Uniformity: The absence of uniformity in the size of firms is another feature of Oligopoly.
Some firms are very large and some are small firms. For example, Maruti holds 86% of share in the
market of small cars; whereas Hyundai and Tata hold a relatively small share.
5. Advertisement: A huge firm has to shell out a lot of money on advertising. Due to the price rigidity
and cross elasticity of demand, advertising the product is the only means for a large firm to magnify
its sales volumes. A large firm’s primary objective of investing huge sums of money on advertising
is to stimulate the demand for its product. In this context, Baumol has rightly said, “It is only in
oligopoly; advertisement comes, fully into its own. Under oligopoly, advertising can become
a life and death matter, where a firm which fails to keep up with the advertising budget of its
competitors may find its customers rifting of to rival products.”
6. Element of Monopoly: Schismatic and incomplete Oligopoly firms have the power of monopoly.
Product distinction creates the sense of brand loyalty in consumers. Every firm has the monopoly
over its brand. No other firm can sell a product within that brand (trademark). Other than this, firms
can earn monopolistic profits by increasing prices through collusion.

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