Page 199 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 13.1 Features of Oligopoly

The characteristics of oligopoly are briefly explained below:

1. Under oligopoly the number of competing firms being small, each firm controls an
important proportion of the total (industry) supply. Consequently, the effect of a change
in the price or output of one firm upon the sales of its rival firms is noticeable and not

insignificant. When any firm takes an action its rivals will in all probability react to it (i.e.

retaliate). The behaviour of oligopolistic firms is interdependent and not independent or
atomistic as is the case under perfect or monopolistic competition.

2. The demand curve of an individual firm under oligopoly is not known and is indeterminate
because it depends upon the reaction of its rivals which is uncertain. Each theory of
oligopoly therefore makes a specific assumption about how rivals will (or will not) react to

an individual fi rm’s action.
3. In view of the uncertainty about the reaction of rivals and interdependence of behaviour,
oligopolistic fi rms find it advantageous to coordinate their behaviour through explicit

agreement (cartel) or implicit, hidden, understanding (collusion). Also because the number
of firms is small, it is feasible for oligopolists to establish a cartel or collusive arrangement.

However, it is difficult as well as expensive to monitor and enforce an agreement or

understanding. Very few cartels last long, particularly when oligopolistic fi rms signifi cantly
differ in their cost conditions.

4. Under oligopoly, new entry is difficult. It is neither free nor barred. Hence the condition of
entry becomes an important factor determining the price or output decisions of oligopolistic

firms, and preventing or limiting entry an important objective.

5. Given the indeterminacy of the individual firm’s demand and, therefore, the marginal
revenue curve, oligopolistic firms may not aim at maximization of profits. Modern theories

of oligopoly take into account the following alternative objectives of the fi rm:
(a) Sales maximization with profi t constraint.

(b) Target or “fair” rate of profit and long-run stability.
(c) Maximization of the managerial utility function.
(d) Limiting (preventing) new entry.
(e) Achieving “satisfactory” profi ts, sales, etc. That is, the fi rm is a “satisfi cer” and not
“maximizer”.

(f) Maximization of joint (industry) profits rather than individual (fi rm) profi ts.

Example: Oligopolies may include the markets for petrol in the UK (BP, Shell and a few

other firms) and soft drinks (such as Coke, Pepsi, and Cadbury-Schweppes).
The accountancy market is controlled by PricewaterhouseCoopers, KPMG, Deloitte, and Ernst &
Young (commonly known as the Big Four).
Three leading food processing companies, Kraft Foods, PepsiCo and Nestle, together achieve a
large proportion [indistinct] of global processed food sales. These three companies are often used
as an example of “Rule of three”, which states that markets often become an oligopoly of three
large fi rms.

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