Page 287 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 15.3 Classification of Oligopoly

The classification of oligopoly can be defined as—
1. Perfect or Imperfect Oligopoly: In Oligopoly, firms produce homogeneous products. It is also known
as Pure Oligopoly. On the other hand, in incomplete or differential oligopoly in which all the firms
produce differential yet close substitute products.
2. Open or Closed Oligopoly: Open Oligopoly is the condition when there is no restriction or barrier
to the entry of firms. Firms are free to enter the industry. But in closed oligopoly, firms have certain
restrictions over entry in the industry. These restrictions could be technical, legal or of any other
type.
3. Partial or Full Oligopoly: Partial Oligopoly is that condition in which a dominant firm exists. This
firm is known as the Price Leader. This Dominant firm and the price head decide the prices and
rest of the firms have to accept the prices. Full Oligopoly is the condition in which the there is no
Dominant or Price head in the industry.
4. Collusive or Non-collusive Oligopoly: In Collusive Oligopoly, firms support each other while
deciding over the prices. They adopt one single policy and do not compete with each other. But in
non-collusive Oligopoly, firms decide over the prices independently and also they compete with
each other.

Write down your thoughts over “Classification of Oligopoly”.

15.4 Why Bigness? Or What Causes the Emergence of Oligopoly?

There are so many reasons to emergency of some big firms in oligopoly market. Some factors are natural
but some are created by the firms themselves.

Natural Causes

(a) Economies of Scale: The theory of `Labour Division is applied to factory productions which means
the process of production is divided into parts and each part is allocated to the most efficient labour.
According to Adam Smith, labour division depends upon the extent of the market. Firms having
a big demand in the market need to produce on a large scale. In order to produce on a large scale,
labour division takes place. The larger is the scale of production, the lesser is per unit average due
to increase-decrease loss. This is known as Economies of Scale and this is how firms increase their
scale of production.
(b) Fixed Costs: The cost of introducing a product in the market is very high. To outline a new product and
to introduce it in the market is not an easy task. The Sunk Cost of a new product and its marketing in
a prevalent market is very high. Sunk cost is the cost which cannot be recovered. In the present time,
products produced from latest technology have a huge production cost. The big firms which have
a detailed sale scale and per unit production is less; their price advantage is higher in comparison
with small firms.
(c) Economies of Scope: To enter a market, to introduce a product and to make the anticipated
consumers aware of the product is a costly affair. The costs of these activities are very high.
These costs cannot be recovered by sales of small firms. If these firms increase the prices of their
commodities, that might result into decrease in sales and might hinder their existence in the market

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