Key Features and Behaviours of Oligopoly Firms
How do firms behave in oligopoly is a vital concept in Economics, especially for students preparing for school or competitive exams like UGC NET and CBSE. Understanding oligopoly helps students grasp how firms make decisions in markets dominated by a few players, influencing prices, output, and competition. This page, brought to you by Vedantu, summarizes key behaviours, models, and real-world examples to clarify this often-confusing topic.
| Characteristic | Description | Examples |
|---|---|---|
| Few Dominant Firms | Small number of large firms control majority of the market | Airlines, telecom, oil & gas |
| Interdependence | Firms make decisions by anticipating rivals’ moves | One airline lowers fares, others react |
| Price Rigidity | Prices stay stable, firms avoid price wars | Petrol prices, telecom tariffs |
| Non-Price Competition | Firms compete via quality, advertising, services | TV ads, data offers, brand loyalty |
| Collusion Possibility | Firms may cooperate (formal/informal) to share markets or fix prices | OPEC oil cartel |
Oligopoly Meaning
Oligopoly is a market structure where a small number of large firms dominate an industry. Each firm’s actions strongly impact others, leading to mutual interdependence. Entry barriers like capital requirement, technology, or government rules keep the market limited to these big players. Common examples include telecom companies, airlines, and the car industry.
How Do Firms Behave in Oligopoly
Firm behaviour in oligopoly is driven by strategic interdependence, price-setting, and the fear of retaliation. Decisions about product, pricing, and promotion are based on predicting rivals’ reactions. Instead of lowering prices, which may trigger price wars and reduced profits, firms rely on non-price competition, such as branding and customer service, to win consumers.
- Firms closely monitor competitors and anticipate responses before changing prices or output.
- Price rigidity is common; firms rarely change prices unless necessary. This is explained by the kinked demand curve model, where price reductions are matched, but increases are ignored.
- Heavy focus on non-price competition—advertising, new features, loyalty schemes.
- Groups of firms may engage in collusion (tacit or open), forming cartels to control prices or divide markets.
- Real-world examples: Indian telecom sector (Jio, Airtel, Vi), airline industry, oil cartels.
Models Explaining Oligopoly Behaviour
Economists use several models to illustrate how firms behave in oligopoly. Knowing these helps in exams and understanding strategic business moves.
| Model | Main Idea | Decision Variable |
|---|---|---|
| Cournot | Firms compete by choosing output quantity | Quantity |
| Bertrand | Firms compete by setting prices | Price |
| Stackelberg | One firm acts as leader, others follow | Quantity (Sequential) |
| Chamberlin | Focuses on mutual recognition of interdependence | Price/Output |
Game Theory and Strategic Behaviour
Game theory is widely used to analyze strategic behaviour in oligopoly. Firms use prediction and careful planning (like a chess game) to make decisions. The Nash equilibrium describes a situation where no firm can benefit by changing its strategy alone—each takes the rival's actions into account. The kinked demand curve is one such game theory example that explains why prices remain sticky.
Real-World Examples of Oligopoly
Oligopoly is observed in different sectors globally and in India:
- Telecom: Jio, Airtel, and Vi dominate the Indian telecom market.
- Airlines: Few carriers control most routes, leading to similar prices and charges.
- Oil and Gas: OPEC cartel controls oil output and prices worldwide.
- Operating Systems: Google’s Android and Apple’s iOS have a duoploly in smartphones.
Comparison: Oligopoly vs Other Market Structures
Students often confuse oligopoly with monopoly and monopolistic competition. Here’s a quick comparison for clarity (detailed study available at Monopoly, Monopolistic Competition, and Oligopoly):
| Aspect | Oligopoly | Monopoly | Monopolistic Competition |
|---|---|---|---|
| No. of Firms | Few large | One | Many |
| Product | Homogeneous/Differentiated | Unique | Differentiated |
| Entry Barriers | High | Very high | Low |
| Interdependence | Yes | No | No |
Why Study Firm Behaviour in Oligopoly?
Understanding this topic helps in Board exams (like Class 11 & 12 CBSE/ISC), entrance tests, and makes sense of news about price changes and industry scandals. Oligopoly behaviour is essential for questions on market structures, strategic pricing, and anti-competition regulations.
Related Topics from Vedantu
- Collusive Oligopoly – In-depth explanation of cartel and collusive strategies.
- Oligopoly Graph – Visualize how firms set price/output.
- Market Equilibrium: Free Entry & Exit – Contrast with oligopoly barriers.
- Features of Company – Learn about the firms that create oligopolies.
- Price and Output Determination under Oligopoly – Exam-level calculations.
At Vedantu, we simplify Commerce topics like oligopoly so students can revise better for exams and interviews. Mastery of firm behaviour in oligopoly ensures strong conceptual clarity for exam questions and improves your understanding of current business trends.
In summary, firm behaviour in oligopoly is shaped by interdependence, price stability, strategic rivalry, and the possibility of collusion. Studying these patterns enables students to analyze how large firms set prices, compete, or cooperate in real markets—a vital skill for exams and business awareness.
FAQs on How Do Firms Behave in Oligopoly?
1. How do firms behave in an oligopoly?
In an oligopoly, a few dominant firms interdependently control the market. They carefully consider competitors' actions before making pricing and production decisions. This often leads to price rigidity and a focus on non-price competition, such as advertising and product differentiation. Some firms might even engage in collusion to maximize profits.
2. What are the main characteristics of an oligopoly?
Key characteristics of an oligopoly include: a small number of large firms dominating the market; significant interdependence among firms; high barriers to entry preventing new competitors; and the potential for collusion or price wars. Firms also often engage in non-price competition.
3. What is non-price competition in an oligopoly?
Non-price competition in oligopolies involves strategies beyond price changes to attract customers. Firms focus on aspects such as product differentiation, branding, advertising, and customer service to gain a competitive edge. This is often seen in industries with differentiated products.
4. How does collusion affect market outcomes in an oligopoly?
Collusion, where firms secretly agree to set prices or output levels, can lead to higher prices and reduced output compared to a competitive market. This results in greater profits for the firms involved but can harm consumers. Such actions are often illegal under antitrust laws.
5. What are the differences between Cournot and Bertrand oligopoly models?
The Cournot model assumes firms compete on the quantity of output, while the Bertrand model assumes competition through price. In Cournot, firms choose output simultaneously, leading to a Nash equilibrium in quantities. In Bertrand, firms set prices simultaneously, often leading to a price war and potentially competitive pricing.
6. How does the kinked demand curve explain price stability in oligopolies?
The kinked demand curve illustrates why prices might be relatively stable in an oligopoly. It suggests that if a firm lowers its price, competitors will follow suit, resulting in only a small gain in market share. However, if a firm raises prices, competitors may not follow, leading to a significant loss of market share. This makes firms hesitant to alter prices frequently.
7. What is the behavior of an oligopoly?
Oligopoly behavior is characterized by interdependence, meaning firms' decisions are heavily influenced by the anticipated reactions of their competitors. This leads to strategic decision-making, where firms consider the potential impact of their actions on rivals. This can lead to outcomes such as price wars, collusion, or price rigidity.
8. What are the characteristics of an oligopoly firm?
An oligopoly firm is part of a market dominated by a small number of large firms. These firms exhibit significant interdependence, meaning their actions affect their rivals and vice versa. They may engage in collusion or non-price competition and often face high barriers to entry.
9. Can you give examples of oligopoly industries?
Examples of oligopolistic industries include the airline industry, the telecommunications sector, and the automobile industry. These sectors are characterized by a few dominant players with significant market power and interdependence in decision-making.
10. How do firms in an oligopoly act interdependently?
In an oligopoly, firms' actions are interdependent because the choices of one firm significantly influence the outcomes of others. A price cut by one firm, for example, might trigger a price war. This constant awareness of rivals' potential reactions shapes decision-making, leading to strategic behavior such as collusion or non-price competition.
