The oligopoly market refers to a market structure in which a few firms are selling homogenous products. Sometimes oligopoly market is also known as the competition among a few firms because there are only a few sellers in the present market and every seller tries to influence consumers through the behavior of firms. The oligopoly market lies between monopolistic competition and monopoly. The oligopoly market is categorized into four different parts that are listed below.
Pure or perfect oligopoly: if the different firms produce equivalent products then it is known as the pure or perfect oligopoly. It is very rare to find a pure oligopoly market.
Imperfect or differentiated oligopoly: if the firms produce differential products then it is identified as an imperfect or differentiated oligopoly. For example passenger cars, cigarettes, soft drinks, and many more.
Collusive oligopoly: if the firms cooperate for determining the price of a similar product then it is called collusive oligopoly.
Non-collusive oligopoly: many firms compete with each other it is known as the non-collusive oligopoly market.
These mentioned different types of oligopoly markets all have similar features that are also highlighted below.
Features and characteristics of oligopoly
There are numerous features of the oligopoly market but the main features of oligopoly are elaborated as follows.
Few firms there in the market
Under the oligopoly market, few firms exist in the market. Each firm produces a similar product and plays a significant role in total output. They serve competition to each other and try to manipulate not only price but also the volume of production. For example, in India, there are few companies of the automobile in the market.
The existence of firms is very few so every action affects the rival firms also. So every firm keeps updating themselves from small activities of rival firms.
The oligopoly firms are interdependent. Interdependent refers to the actions of one firm that affect the action of other firms. If one firm reduces the price of the particular firm then it will affect the sale of that particular item of another firm. This will show a change in output and price that will evoke a reaction from others operating in the market.
The oligopoly firms are in a position to influence the prices. However, firms try to avoid price competition because it can be the cause of losses. They follow the policy of piece rigorously. Price rigorous policy refers to a situation in which firms fixed the price of homogenous products irrespective of changes in demand and supply conditions. Firms adopt amazing marketing strategies for competing with each other.
If a firm tries to reduce the price then competing firms also reduce the price of the particular product. On the other hand, if a firm raises the price then other firms will not do the same. This is a reason the firms of oligopolies do not prefer price competition.
Restriction in the entry of firms
The main reason for few firms in the oligopoly market is, that there are a lot of restrictions that exist for new firms that prevent the entry of new firms into the industry. New firms required patents, the requirement of large capital, control of required raw materials, goodwill requirements, and many more. Only those firms can enter an oligopoly market that overcomes all these mentioned barriers.
Role of selling prices
In the oligopoly market, the selling price is fixed by the firms because the business relies more on non-price competition. Firms use numerous advertising strategies to promote sales of the products. Advertisement plays a crucial role in the oligopoly market. Sometimes advertisement can be a matter of survival for the firm.
Under oligopoly, there is full interdependence among firms. So, price and output both are considerable for decision making because in oligopoly firms directly influence the competition among the firms. Rather than the use of independent price and output strategy, oligopoly firms prefer to use price along with output strategy for safeguarding the interest of the firm.
Oligopoly firms may produce homogeneous or differentiated products. As mentioned the four types of oligopoly markets exist pure or perfect oligopoly, collusive oligopoly, non-collusive, imperfect, or differentiated oligopoly. The market condition depends on them based on the nature of the firm types.
Under oligopoly firms' advertisement policy play a vital role against the competition. If the firm changes in prices of a product then the firm uses advertisement as a tool to maintain business operation. A firm oligopoly can start an aggressive promotion strategy for attracting large audiences when any change in the price and output of the product.
Indeterminate demand curve
Under the oligopoly firms' behavior patterns cannot determine with certainty. So demand curve faces a lot of indeterminates. Because if price changes cannot ignore by the rival firms and it impacts the sales of production.