An oligopoly market is a market structure characterized by a small number of large firms that dominate the industry. In an oligopoly, each firm has significant market power, which means that its decisions can have a significant impact on the market as a whole.
The barriers to entry for new firms are high, and there is often intense competition among the existing firms.
The firms in an oligopoly market often produce similar or differentiated products, and they may engage in non-price competition, such as marketing and advertising, to differentiate themselves from their competitors.
Due to their significant market power, firms in an oligopoly market may engage in collusion or other anti-competitive behavior to maintain their dominance and limit competition.
Examples of industries with oligopoly market structures include telecommunications, airlines, and the automobile industry.
Oligopoly is a market situation in which the number of sellers dealing in a homogeneous or differentiated product is small.
Characteristics of Oligopoly Market
The following are the key features of the oligopoly:
1. Few Large Firms
In an oligopoly market, there are only a few large firms that dominate the market.
These firms have a significant market share and are often well-established in the industry.
Examples of oligopolies include the automobile industry, telecommunications industry, and airline industry.
The firms in an oligopoly market are interdependent, meaning that their actions and decisions have a significant impact on the other firms in the market.
For example, if one firm reduces its prices, other firms may be forced to reduce their prices to remain competitive.
3. Barriers to Entry
There are significant barriers to entry in an oligopoly market, making it difficult for new firms to enter the market.
These barriers may include high start-up costs, government regulations, and limited access to distribution channels.
4. Differentiated Products
Firms in an oligopoly market often differentiate their products from those of their competitors.
This differentiation may be in the form of branding, quality, or features.
This strategy helps firms create brand loyalty among consumers.
5. Advertising and Marketing
Due to the intense competition in an oligopoly market, firms often spend a significant amount of money on advertising and marketing to promote their products and differentiate themselves from their competitors.
6. Price Stability
Oligopolies tend to have more price stability than other market structures.
This stability is because firms are aware that any significant change in prices can lead to a price war, which can be detrimental to all firms in the market.
In an oligopoly market, firms may collude with each other to control prices and limit competition.
This collusion may be in the form of price fixing or market-sharing agreements.
Collusion is illegal in most countries, and firms caught engaging in this behavior can face significant fines.
8. Group Behaviour
The theory of Oligopoly is a theory of Group behavior, not of mass or individual behavior and to assume profit-maximizing behavior on the Oligopolist’s part may not be very valid.
There is a Generally Accepted theory of group behavior. Do the members of a group agree to pull together in the promotion of common interests or will they tighten to promote their individual interests?
Does the group possess any leader? If so how does he get the others to follow him?
Each Oligopolist closely watches the business behavior of the Other oligopolist in the industry and designs his moves on the basis of some assumptions of how very behave or is likely to behave.
9. Non-Price Competition
In addition to price competition, firms in an oligopoly market also engage in non-price competition, such as advertising and product differentiation.
This competition allows firms to maintain their market share without having to resort to significant price reductions.
10. High Profits
Due to the limited competition in an oligopoly market, firms can earn high profits.
These profits can be used to invest in research and development, marketing, and other business activities.
11. Strategic Behavior
In an oligopoly market, firms engage in strategic behavior, meaning that they consider the likely response of their competitors when making decisions.
For example, a firm may not reduce its prices too much, as it expects its competitors to do the same, leading to reduced profits for all firms in the market.
12. Game Theory
Game theory is often used to analyze the behavior of firms in an oligopoly market.
This theory helps to explain why firms may engage in collusion, price fixing, or other strategic behavior.
13. Price Leadership
In an oligopoly market, one firm may emerge as a price leader, meaning that the other firms in the market follow its lead on pricing decisions.
This strategy helps to reduce the risk of a price war and maintain price stability in the market.
14. Merger and Acquisition
Firms in an oligopoly market may merge or acquire other firms to increase their market share and reduce competition.
This strategy can be beneficial for the firms involved but can lead to reduced competition and higher prices for consumers.
15. Government Regulation
Due to the potential for collusion and other anti-competitive behavior in an oligopoly market, governments may regulate the market to ensure fair competition and protect consumers.
16. Strong Composition
Under this market condition, there is strong competition among various sellers.
Each seller wants to retaliate its price on the basis of the reaction of other sellers.
17. Homogeneous Product
Another important feature is Homogeneous products.
When a producer is producing a Homogeneous product it is said to be a Homogeneous Oligopoly.
18. Heterogeneous Oligopoly
When a few sellers or producers are producing heterogeneous products or differentiated products it is said to be a heterogeneous Oligopoly.
19. Lack of Uniformity
Another important feature is the lack of uniformity.
The size of the firms is not uniform. Some firms are very large while other firms are very small.
This condition is called an asymmetrical.
20. Price War
Oligopoly firms are always engaged in a price war.
Product differentiation leads to the possibility of a price war.
When any firm cuts the price their firm’s snail doing this same that results in a price war.
21. Demand Curve
The demand curve is indeterminate because of the mutual interdependence of the firms and the actions or reactions of an individual firm affect others as well.
An oligopoly is a market structure characterized by a small number of large firms dominating the market. Key features of an oligopoly include the concentration of market power, interdependence, barriers to entry, product differentiation, advertising and marketing, price stability, collusion, non-price competition, high profits, strategic behavior, game theory, price leadership, merger and acquisition, government regulation, and price discrimination.
These features contribute to the unique dynamics of an oligopoly market and have important implications for firms and consumers.