The structure of a market refers to the degree of competition which is prevailing in the current marketplace. Hence, an industrialist must understand every little detail of the market to successfully run a business. Over time, many kinds of markets have developed in the economic world. These include purely competitive markets, pure monopoly, oligopoly, monophony, etc. Each market has its defining characteristics and features. However, in this blog, we will discuss only the oligopoly market at length. In a nutshell, oligopoly market is where a small number of large organisations dominate the entire industry and have the entire market share. For example, the automobile industry can be termed as an oligopoly market.
What is oligopoly? Oligopoly is a structural type of market, consisting of and dominated by a small number of firms. It can be described as a form of “imperfect competition” where the actions of a firm significantly influence the other firms in the market. This is in stark contrast to monopolies, where a single firm controls the entire market.
There is limited competition in an oligopoly market. This induces the firms to collaborate to keep hold of the market and compete with others. This interdependence is one of the main characteristics of oligopoly.
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Different types of oligopoly exist in the present day scenario. All these types of oligopoly arise due to many factors. These factors include the nature of the product, the openness of the market, the degree of collaboration between the competing firms, the structure and the functioning of the competitive firms in the market, etc.
All these types of oligopoly are discussed below.
1. Pure or Perfect Oligopoly
Here, the product is homogenous. The aluminium industry is a good example of this type of market.
2. Differentiated or Imperfect Oligopoly
In this type of oligopoly market, the concerned product is differentiated. The talcum powder industry is an example of an imperfect oligopoly.
In this case, new firms are open to enter the market and compete with the already existing firms.
Entry for the new firms is restricted in this type of market.
In this case, the existing firms come to terms about the output and price of the products.
Due to the lack of understanding between the firms, all the firms compete with each other.
When a large firm dominates the market, it becomes the price leader of the market. This is called a partial oligopoly.
In this type of oligopoly market, there are no price leaders.
When a centralised syndicate conducts the sale products in a market, it is called a syndicated oligopoly.
Firms often create a centralised association to fix output, prices, quotas, etc. This is called an organised oligopoly.
The major defining features of oligopoly are as follows:
Interdependence among firms is a major character in an oligopoly. This means that the action of a particular firm affects the other firms in the market.
2. Prevalence of Advertisement
Interdependence forces firms to resort to high-end marketing strategies to grab a bigger chunk of the market.
3. General Entry Restriction
Entry in an oligopoly market is severely restricted. Start-ups have to face fierce competition and economic prowess from the existing firms to enter.
4. Group Behavior
Group behaviour is crucial in an oligopoly. To maintain a true oligopoly, every firm must abolish profit-maximising behaviour. In an oligopoly, all the firms work as a team to achieve success.
To properly understand oligopoly, examples may be the perfect way to visualise them.
Examples of Oligopoly are as Follows:
Beverage/Soft Drinks industry
Wholesale Beer industry
Photographic equipment industry
Music industry, etc
The profit-maximising condition is the same for perfectly competitive firms and oligopolistic firms. Oligopolists maximise profits by equalising marginal revenue and marginal cost. However, any change in marginal cost or marginal revenue cannot always be adjusted by a corresponding change in price/quantity. This is because the demand curves are kinked. The firms, however, shut down when the price falls below the average variable cost.
Q1. Why are Prices Mostly Stable in Non-Collusive Oligopolies?
Ans: In a non-collusive oligopoly, there are only a few large firms. Hence, changing prices is not beneficial to any firm. When one firm raises its price, other firms maintain their price level. As such, consumers buy goods from other firms at a lower price. Likewise, when one firm lowers its price, other firms also decrease their prices so that they do not lose customers.
Oligopolistic markets, thus, give rise to kinked demand curves. At higher prices, the demand curve is highly elastic. And at lower prices, the demand curve is relatively inelastic. The kink is present at the intersection of the two demand curves.
Q2. Discuss 2 Barriers of Entry in an Oligopoly Market.
Ans: The existence of several entry barriers in an oligopoly market enables oligopolies to exist. These barriers include:
Government regulation: Some businesses need to procure licenses like construction permits, taxi licenses etc. The government grants license/permit to only a few firms.
Research and development cost: The cost of the initial research and development is very high. Thus, only incumbent firms can afford that. This means new firms cannot enter the market when existing firms are making supernormal profits.
Returns to scale: When a firm has increasing returns to scale, a proportionate increase in inputs results in a greater proportionate increase in outputs. This implies that larger firms will have lower average costs than smaller firms. Hence, new smaller firms have few incentives to enter oligopoly markets.