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: Features and Examples
1. What defines an oligopoly market structure?
An oligopoly market is characterized by a small number of large firms that dominate the industry. These firms exhibit significant interdependence, meaning the actions of one firm directly affect the others. Products in an oligopoly can be either homogeneous (like steel or cement) or differentiated (like automobiles or soft drinks).
2. Can you provide common examples of oligopoly markets?
Common examples of oligopoly markets include the aviation industry (e.g., few major airlines), automobile manufacturing (e.g., Maruti Suzuki, Hyundai), telecommunications (e.g., Jio, Airtel, Vodafone Idea), steel production, and large soft drink companies (e.g., Coca-Cola, PepsiCo). In these sectors, a few dominant players hold most of the market share and influence market dynamics.
3. Why are there typically only a few firms in an oligopoly?
The limited number of firms in an oligopoly is primarily due to significant barriers to entry. These barriers can include high capital requirements, advanced technology needs, economies of scale enjoyed by existing firms, strong brand loyalty, and sometimes government regulations. These factors make it challenging for new firms to enter and compete effectively with established players.
4. Why do prices tend to be stable in non-collusive oligopolies?
In non-collusive oligopolies, prices tend to be stable due to the fear of a price war. If one firm lowers its price, rivals are likely to follow suit to avoid losing market share, leading to reduced profits for all. Conversely, if a firm raises its price, competitors may not follow, causing the price-raising firm to lose customers. This strategic interdependence often results in a kinked demand curve, promoting price rigidity and stability.
5. What are the key barriers to entry in an oligopoly market?
Several factors act as barriers to entry in an oligopoly market, making it difficult for new firms to compete:
- High Capital Investment: Many oligopolistic industries, such as automobile manufacturing or telecommunications, require substantial initial investment in plant, machinery, and technology.
- Economies of Scale: Existing large firms benefit from lower average costs due to large-scale production, giving them a significant cost advantage over potential new entrants.
- Strong Brand Loyalty and Advertising: Established brands have built considerable consumer loyalty, necessitating immense marketing efforts and capital for new firms to break into the market.
- Patents and Licenses: Intellectual property rights or exclusive government licenses can restrict new firms from entering certain industries.
6. Why is Netflix considered an example of an oligopoly?
Netflix operates within an oligopoly in the streaming service industry. While numerous platforms exist, a few dominant players like Netflix, Disney+, Amazon Prime Video, and Max (formerly HBO Max) control a vast majority of the market. Their decisions regarding content acquisition, pricing strategies, and global expansion are highly interdependent, meaning Netflix's strategic moves directly influence its major competitors and vice-versa, characteristic of an oligopoly.
7. How does interdependence influence firm behavior in an oligopoly?
Interdependence is a defining feature of an oligopoly and profoundly influences firm behavior. Each firm's decision about pricing, output, advertising, or investment must consider the likely reactions of its rivals. This often leads to strategic planning, where firms anticipate competitors' moves, resulting in either non-price competition (like product differentiation or advertising campaigns) or occasional price wars. It also explains why firms might engage in collusion (explicit or implicit) to maximize collective profits.
8. What are the primary characteristics of an oligopoly?
The primary characteristics of an oligopoly include:
- Few Sellers: The market is dominated by a small number of large firms.
- Interdependence: Firms' decisions are mutually dependent, as each firm must consider its rivals' reactions.
- Barriers to Entry: Significant obstacles prevent new firms from easily entering the market.
- Non-Price Competition: Firms often compete through product differentiation, advertising, and customer service rather than just price cuts.
- Homogeneous or Differentiated Products: Products can be identical (pure oligopoly) or distinct (differentiated oligopoly).
9. What are the different types of oligopoly with examples?
Oligopolies can be classified based on various factors:
- Pure (or Perfect) Oligopoly: Deals in homogeneous products, where goods are identical across firms (e.g., steel, cement).
- Differentiated (or Imperfect) Oligopoly: Deals in differentiated products, where goods have unique features or branding (e.g., automobiles, soft drinks).
- Collusive Oligopoly: Firms explicitly or implicitly agree to cooperate, often forming cartels to control prices and output (e.g., OPEC).
- Non-Collusive Oligopoly: Firms compete without explicit agreements, leading to strategic interdependence and often price rigidity, as seen in the airline industry.
