It is a form of the market in which there are a few
big sellers of a commodity and a large number of buyers. Each seller has a
significant share of the market.
There is a high degree of interdependence
among the sellers regarding their price and output policy.
When the number of sellers of a product is two to
ten, it is a situation of oligopoly market.
For example goods like automobolies, electronic
products and many of the consumer products like baby foods, vegetables oils,
soft drinks, etc.
There are only a few auto-producer in the Indian
market. Maruti, Tata, Fiat, Ford and GM are well known brand names.
Features
of Oligopoly
1)
Few Firms :
A few firms, but large in size, dominate the market
for a commodity.
2)
Large Number of Buyers :
There is a large number of buyers of a commodity.
The number is so large that no individual buyer (by varying his demand) can
impact market price of the product.
3)
Entry barriers :
The existence of Oligopoly in the long run
necessitates the existence of barriers to the entry of new firms to the
industry, nor oligopoly may not retain its characteristic of few sellers in the
long run.
There are various barriers to the entry of new
firms.
These barriers are almost similar to those under monopoly, Entry of the
new firms is extremely difficult, if not impossible.
Some major barriers to entry are economies of large
scale production, cost advantage of the old firms, price cutting, control over
important inputs, patent rights, etc.
These factors prevents the entry of new
firms and preserve the oligopoly.
4) High
degree of interdependence :
There is a
high degree of interdependence between the firms.
Price and output policy of
one firm significantly impacts the price and output policy of the rival firms
in the market.
For ex: If GM Motors reduces price of its cars, Ford
Motors may also do the same.
If Maruti Udyog offers free insurance of the cars to
the buyers of Maruti cars, the other car companies like Santro may also make
the same offer to the buyers of Santro cars.
So, while taking an action on price or output, a
firm must take into account the possible reaction of the rival firms in the
market.
It is this interdependence, action and reaction by
the rival firms, which sometimes leads to price war and price cutting among
competitors.
5) Indeterminate
Demand curve :
It is not possible to determine firm’s demand curve
under oligopoly, as it is not possible to predict change in price.
When a firm
lowers its price, demand for its product may not increase, because the rival
firms may also lower the price.
An oligopoly cannot ignore the reaction of the rival
firms in view of the interdependence of firms. Any change in the price by one
firm may result in a change in prices by the rival firms.
As a result, the
demand curve faced by an oligopolist keeps on shifting.
Therefore, demand curve of an oligopolist is not
definite, instead it is indeterminate.
6)
Non price Competition :
Under Oligopoly, firms tend to avoid price
competition.
For example: In India Coke and Pepsi drinks sell at
the same price.
But, in order to enhance its share of the market, each firm
tries to resort to non price competition, like Coke and Pepsi sponsor different
games and sports and also many lucrative schemes.
7)
Nature of the Product :
The firms under Oligopoly may produce homogeneous
product or differentiated product.
In automobile industry, Maruti, Santro,
Indica and in refrigeration industry, LG, National and Godrej are the examples
of differentiated oligopoly.
And cooking gas of Indane and Burshane are the
examples of pure Oligopoly.
8) Intense
competition :
When there are a very few producers in an industry,
keen competition among them is bound to exist. Since there are only a few
firms, each firm produces a large share of the market.
So any action by one firm is likely to affect the
rival firms.
So every firm keeps a close watch on the activities of the rival firms.
Oligopoly is the highest form of inter-firm competition.
9)
Selling cost :
In view of the intense competition and
interdependence of firms under oligopoly, the firm compete each other through
various sales promotion measures like price cutting, discounts, door to door
campaign, advertisement, etc.
So there is a great importance of selling costs
and advertisement under oligopoly market structure.
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