Page 285 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 7. Existence of Price Rigidity: Existance of price Rigidity is another feature of Oligopoly. Price rigidity
means no change in the prices by the firms. Because any change in the price would not be profitable
for the firm, therefore, a firm sticks to its prices. If a firm tries to reduce its prices, in return its
competitors would reduce their prices as well yielding no profits for any firm. In the same way, if
a firm tries to increase its prices, it will end up losing its customers and in turn facing loses. Hence,
price rigidity is witnessed in Oligopolistic market.
8. Keen Competition: There is an acute competition between the competitors in Oligopoly. The number
of sellers is so less that a step taken by any firm affects other participants immediately. Consequently,
each firm monitors the activities of its competitors and is always ready with its defensive actions.
For an oligopolist, business is a continuous struggle because the market situations make him face
every move in the market. This type of competition is unique and cannot be found in other markets.
Oligopoly is the highest form of market.
9. Uncertainty: Due to the mutual interdependence of the firms, it is not possible to predict the behaviour
of any firm. Based on the existing facts, it is very difficult to estimate the current financial changes.
Therefore, uncertainty always exists in Oligopoly.
10. Existence of Non-profit Motive: In Oligopoly, maximum profit is not the only motive of a firm.
There can be other motives like – sales maximisation, minimisation of risk, output-maximisation,
security maximisation, etc. It is very difficult to determine the balance between price and production
in case of absence of maximum profits as a motive.
11. Some Barriers to Entry: The restrictions on entry into the industry of the Oligopolistic firms are
another feature. Some general restrictions are – scale of savings, absolute costs profit to old firms,
control over patent rights importance inward, existence of preventive prices and excess capacity,
etc. The above mentioned barriers stop the entry of new firms.

Self Assessment

Fill in the blanks:
1. Brand loyalty is ..................... in consumers due to product distinction.
2. Every firm has ..................... over their brand.
3. Price rigidity is another feature of ..................... .
4. Price is found to be ..................... in Oligopolistic market.

Three Basic Features of the Oligopolistic Market Structure

(i) Interdependence among the Firms: Mutual interdependence of firms in decision-making is an important
feature. Why interdependence? Because when the number of participants is very less, any change in the
production or price by a firm directly affects the profits of other firms. Therefore, their reactions would
either be in the form of change in price and production or in the form of intensive publicity in order to
attract more buyers.
Therefore, while deciding over quantity of production and price not only a firm has to consider the
demand curve but also has to consider the reactions of the competing firms.
(ii) Advertising and Selling Costs: Due to the mutual interdependence of the firms of an Oligopolistic
market, the firms have to adopt various defoliation related aggressive and defensive techniques so
that they can capture the maximum market share and can retain their current position in the market.
Therefore, they have to spend on publicity and sale incentive. This is why publicity and sales costs hold
an important place in the Oligopolistic market. To note, a firm does not keep reducing the price of its
commodities rather they keep competing over non-price basis. Because price reduction results into price
war between the firms, hence resulting in the ouster of few firms.

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