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Unit 13: Oligopoly

At the same time, collusive behaviour, though difficult, cannot be ruled out. To reduce Notes
the uncertainties of price wars, producers may collide with each other and charge the
maximum profit making price. For society, it would be more like a monopolist kind of

market under the garb of competition. Yet another way to deal with uncertainties with
respect to rival reactions would be collusion. Adopting a “follow the leader” policy may
result in tacit collusion. This has often been witnessed in the paints industry — when one
company comes out with a price change, it is followed by the other players. What all this
indicates is that mesoeconomic companies shun price competition.
But often such collusive behaviour is accompanied by non-price competition. This
phenomenon has also been witnessed in the paints industry. The emphasis on non-price
competition has its roots in two facts. One, price cuts can be quickly and easily met by a
firm’s rivals who may promptly react to cancel out any potential gains in sales through

matching price cuts. There is also the risk of price war. On the other hand, non-price
competition is harmless and can be safely carried out without any side effects through
product innovation, improvement in productive techniques and advertising gimmicks

which may be difficult to replicate.
This is exactly what the paints industry has been following for the last three years with
the introduction of consumer-interactive marketing methods for advertising paints –
‘Insta Colour’ by Jenson & Nicholson, “Colour Solutions” by ICI India, “Colour Bank’
by Berger Paints and “Colour World’ by Asian Paints. ICI India’s generous offer to paint

the Ananthpur Sahib could also be fitted into the category of non-price competition.

And, second, mesoeconomic firms generally have the financial strength to support such

advertising.

But are such mesoeconomic structures economically efficient? Traditional view holds that
being characterised by barriers to entry, mesoeconomic entitles can be expected to result in
a restriction of output short of the point of lowest unit costs and a corresponding market

price which yields substantial, if not maximum, economic profits. But Kenneth Galbraith,
in his book American Capitalism, challenged this view by arguing that mesoeconomic fi rms,
because of their inherent strengths, are necessary to ensure rapid technological growth.

They have the necessary financial muscle to undertake innovations and research.
Empirical research on this aspect has been ambiguous. Though consensus opinion has it
that big mesoeconomic industries are not big contributors to technological progress, there
are quite a few exceptions. The paints industry has been one.
The industry, recognising the need to differentiate itself from others, has been frequently
introducing technologically innovative products. The introduction of interactive paints
solutions, anti-bacterial exterior paints and washable plastic emulsion paints are just
some of the innovations. It is of interest that some leading researchers in this fi eld have
tentatively concluded that technological progress in an industry may be determined more

by the industry’s scientific character and “technological opportunities” rather than by its
market structures.
Question
Identifying the factors contributing to the paint industry for becoming oligopoly.

13.5 Summary

Oligopoly is a situation in which only a few firms (sellers) are competing in the market for
a particular commodity.

Under oligopoly, each firm controls an important proportion of the total supply. The
demand curve of an individual firm under oligopoly is not known and is indeterminate.

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