Oligopoly refers to a market that is dominated by few firms that have a firm grip of the market. Oligopoly has distinct features that define it. According to Tucker. B. I economists define oligopoly as a market structure characterized by few sellers, homogenous products and difficult market entry (Tucker. B. I, page 261, 2008). An oligopoly market is defined by directly scrutinizing the behavior exhibited by the players in the market. In an oligopoly set up any decision that is undertaken by one of the players in the market has a significant impact on the other players in the market. It is dominated by a few large suppliers who are interdependent on each other, before making any pricing and investment decisions.
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It is also explained as a market condition in which sellers are so few that an action of any one of them will materially affect price and have a measurable impact on competitors; in other words; since there are few participants in this type of market, each Oligopolistic is aware of the actions of the other (Jain. R). The oligopoly structure is exhibited by mostly big corporations in any given country. The corporations are mostly oil companies, steel, and even automobile sector. The nature of the corporations and the investment required limits the number of players in the market, thereby making them oligopolistic.
Oligopolists may sometimes act like monopolies, given their small number and the size of the firms. For instance unlike in other markets, oligopolists set the prices of the products. This is an attribute associated by monopolies. The oligopolists exhibit certain characteristics that define the oligopoly type of market in general. These features are few players, distinct products and restricted entry.
An oligopoly is characterized by a small number of producers or sellers who dominate the market. However there is no number placed to determine whether or not a given structure falls in the category of oligopoly. Therefore it is not about the small number of firms, but also the powerful nature of the firms that dominate the market. This is where; the issue of interdependence comes in. in this market structure, the decisions made by one firm, will significantly affect the decisions and strategies of the other firms in the market. This is all due to the fact that there are very few players in the industry. For instance if shell wants to increase the price of gas, it must consider the manner in which the likes of BP will react before going ahead with its plan. This is not the case in other markets such as the perfect competition. Collusion is another aspect that illustrates the interdependence of the players given their small number in the market. The concept of few players is achieved if the firms are too big with regard to the market and they can control the prices in the market.
Given the few firms and the possibility of collusion with each other, the industry profits are given by p* xyz, assuming the costs are constant. The point at which the marginal cost curve intersects the marginal revenue is where the profits of the industry are maximized.
The products may be distinct from each other depending on the firm or they may be homogenous. For instance petroleum dealt by shell is not different from that which BP deals with. But as regards differentiated products, take Toyota and BMW. The products of these two firms are differentiated from one another. The buyers may or may not show incidences of indifference when they make purchases in this market.
Just like a monopoly, this market is dominated by few powerful firms. The entry of new firms is not common for a number of reasons, such as financial constraints, patent rights, control of resources and other aspects such barriers relating to laws.
Competition in the oligopoly market
The competition in the oligopoly market is basically non-price oriented. It is practically impossible to witness a price war pitting two or more firms in an oligopoly market. This is due to the fact that all the firms in the market are powerful, hence any reduction in price by one can be matched by the other firms, and therefore there is no need of any firm going that route in the first place. The only way the firms in this market can outdo each other is to offer attractive services in addition to aggressive advertisement in order to pull customers away from their competitors. It all depends on what type of business the firm is involved with. For instance, in the petroleum industry, the firms do not need to advertise, all they need to do is place their petrol stations in strategic locations and open for long hours in order to tap many customers. The other way is partnering with companies to provide products and services on credit to its employees. This is all an effort to attract the bulk of customers their way.
a reduction of price, if their rivals reduce the prices in order to consolidate their market share. The curve also shows the fact firms in the oligopoly market will not raise their prices just because one of the competitors has decided to increase its price.
Increasing the price beyond x1, the elastic nature of demand is exhibited. This is because the other firms do not increase their prices. As illustrated, the firm that increases the price of its commodities will lose its market share.
The inelastic nature of demand is illustrated when one firm decreases its price. The firm will gain some stake in the market, thereby forcing the other firms to lower their prices. This means the overall revenue of the industry may reduce.
The other companies, for example the automobile industry, advertisement is fundamental in addition to other after sale services. The advertisement expenses incurred by these firms are enormous. Take car races for example, the automobile companies provide vehicles to the rally drivers for free and even incur the race expenses. This is one way of advertising coupled with numerous adverts on the television designed to make the products appealing to buyers in addition to marketing them.