Oligopoly Meaning
An Oligopoly Market is a system of Markets where there are more than one Vendor (or firm) for trading of a particular good but there are very few Vendors. This is imperfect competition as the decision of one Vendor affects the decision of others in the Market, although the competition is very limited. The main characteristics of this type of Market is the interdependence of the Vendors that urge them to collaborate and compete with each other to control the Market, affecting the demand and supply based on the prices.
Characteristics:
As mentioned above, the main characteristic feature of this type of Market is interdependence of the firms. The other defining features of the Market are:
Group behaviour: To maintain the Market system, all the firms have to work together.
Restriction on entry: Entry in a tight knit Oligopoly Market is strictly restricted, new firms trying to grow up or existing Vendors trying to expand have to face serious competition.
Emphasis on Advertisement: To get a bigger hold of the Market, each Vendor tries to reach out more through advertisements.
Types of Oligopoly Market
Oligopoly Markets can be classified differently based on different factors affecting the Market such as nature of the product, openness of the Market, degree of collaboration between Vendors, functioning and structure of the Market, etc.
Nature of the Market:
Pure Oligopoly: The product in this type of Market is Homogenous, for example, the Aluminium Industry.
Differentiated Oligopoly: The products are differentiated in this type of Oligopoly Market, for example, the Talcum Powder Industry.
Openness of the Market:
Open Market: Here, any new firm trying to enter the Oligopoly Market can compete with the existing firms to establish a hold.
Closed Market: Entry is strictly restricted to new firms.
Collaboration between existing Vendors in the Market:
Collusive: The firms collaborate with each other and control the product output and Market price for the product.
Competitive: In this type of Oligopoly, the Vendors do not co-operate with each other and compete instead.
Functioning of firms:
Partial: When a firm takes a big hold of the Market and starts controlling the prices, the other Vendors have to comply accordingly. This is a case of partial Oligopoly Market.
Full: When there is no price controlling Vendor and every Vendor works more or less the same way, it is full Oligopoly Market type.
Fixing of products price:
1. Syndicated Oligopoly: When only a very small group or an individual firm controls the sale of products, it is a case of Syndicated Oligopoly.
2. Organised Oligopoly: When all the firms work together to fix output, sale, prices, etcThe Market is called Organised Oligopoly Market.
Interestingly, the Oligopoly Market demand is marked by kinked demand curves. Therefore, oligopolists maximize profits by balancing marginal revenue with the marginal cost of the concerned product.
FAQs on Oligopoly
1. What is an Oligopoly Market?
An Oligopoly Market is a type of Market characterized by a small number of firms that collaborate and compete with each other to control sale, prices and other factors of a product which can be either homogeneous or differentiated. The competition is limited but entry is often restricted and the actions of each firm affects the others.
2. What are some examples of Oligopoly Market?
Some examples of the Oligopoly Market are the Aviation Industry, Automobile Industry, Music Industry, Oil Industry, Steel Manufacturing, Grocery Chain Stores, Tire Manufacturing Industry, Pharmaceuticals, etc. To know more about the other examples of the Oligopoly Market, visit Vedantu's website or app where you can get free resources on this topic and much more. Download them in the PDF format and access them anytime.
3. Why is there a limited number of firms in the Oligopoly Market?
In an Oligopoly Market, the firms need to invest huge sums of money to survive the competition and tackle the possibilities and risks in fluctuations of demand and supply as well as of profit margin as any changes in the policy and pricing by one firm can change the game for every other firm. So in order to stay relevant, they have to stay a step ahead and always be active. Therefore, the competitors in an Oligopoly Market are less but the competition itself is fierce.
4. Why are prices mostly stable in Non-Collusive Oligopolies?
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.
5. Discuss 2 barriers of entry in an Oligopoly Market?
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.
