Oligopoly Market Structure Meaning- Definition, Type, Examples

Oligopoly Market Meaning

Oligopoly market structure is a form of imperfect competition and is usually described as the competition among a few.

Market having seller between the two to ten and the products are homogeneous or differentiated products is referred as oligopoly. For instance, cold drink industry in India selling homogeneous as well as differentiated drinks in the market.

oligopoly market

oligopoly market

Types of Oligopoly Market

There are many different reason which gives rise to different types of an oligopoly market and gives the elaborated oligopoly meaning in economics.  Here are different reason and causes of different types of oligopoly market to illustrate the oligopoly meaning.

Types of Oligopoly Market
Types of Oligopoly Market
  • Pure or Perfect

Pure or perfect oligopoly market refers to the market which is having homogeneous products i:e similar products oligopoly market. Though, it isn’t easy to find a pure oligopoly situation. Cement, steel, aluminium and chemicals producing industries are one of the best examples of pure oligopoly market structure.

In case of pure oligopoly market, sellers are sell homogeneous products. So, the differences between the price of products will be rather insignificant. Hence, the interdependence among sellers increases in case of pure oligopoly market.

  •   Differentiated or Imperfect

Differentiated or imperfect oligopoly market refers to the market which is having different products. Like, passenger cars, cigarettes or soft drinks etc. These industries produces products have different characteristics. But, all the products are close substitutes.

In case of differentiated oligopoly market, sellers are different products. So, the differences between the price of products will be insignificant. Hence, the interdependence among sellers decreases in case of differentiated oligopoly market.

  • Collusive and Competitive

Collusive market occurs when few firms come to an understanding of the price and output of the products. It forms with the firms collusion that is why it is called collusive oligopoly.

Non-collusive oligopoly can cause a serious competition among sellers. As a result, market changes from oligopoly to monopoly market. To demolish the price cutting competition,sellers comes to the agreement. Which gives rise to collusive oligopoly. Average cost pricing is the key feature of this type of market.

  • Non-Collusive Oligopoly

Non-collusive oligopoly refers to the market where firms behaves independently but in reality they are interdependent in the industry. Sellers behaviour in this form of market depends upon how firms think about other sellers in the market.

Sellers can only think about the possible reaction of other sellers if one firm make any decision. Hence, studying rival firms behaviour becomes part of the firms operation.

These are the four different types of oligopoly market.

Features of Oligopoly Market

Features of oligopoly tells about the functioning of the market and the behaviour of the sellers. Here are the features of oligopoly market. 

Features of Oligopoly Market
Features of Oligopoly Market
  • Few Sellers

Few sellers and many consumers is the reflection of oligopoly market. In oligopoly firms number vary between two to ten. Firms has the good control over the market and the price. Also, sellers in market keep close observation on other seller’s behaviour.

  • Interdependence

Sellers in oligopoly are dependent on each other because of the decision of one firm effects the entire industry. Due to this, sellers studies about the rival  firm behaviours. Change in prices of one firm, compiles other firms to do the same to keep their market share.

  • Advertising

Advertisement is the base to make the competition among the sellers more intense. Therefore, it takes a lot of firm resources on advertisement on frequent bases. Firm which is spending more aggressively on advertisements make higher impact on consumers and negative impact on other firms

  • Competition

Due to less number of sellers in the market, competition gets more intense. Because of this one firm decision effects the other rival firms as well. Which makes the firms to keep in check with other firms activities and behaviour.

  • Entry and Exit Barriers

In oligopoly market, process for firms to exit from the industry is easy. there are no regulations or laws for firms while leaving the industry. However, new firms faces certain barriers while entering in the industry. Barriers can be classified as:

  • Government license
  • Patent
  • Large firm’s economies of scale
  • High capital requirement
  • Complex technology, etc.

 Sometimes the government regulations favour the existing large firms, thereby acting as a barrier for the new entrants.

  • Lack of Uniformity

There is no one size of firm in the industry i:e size of the firms in the industry is not fixed. in most cases size of the firms size differ considerably. Firms can be very small or big, this is called asymmetrical.

  • Existence of Price Rigidity

 

In an oligopoly industry if one firms reduces its prices, it makes the rival firms as well to reduce the prices to keep themselves in the market. In order to have competitive edge in the market rival firms keep their prices lowest. That leads to, price war in the industry. 

In order to have peace in the market firms tries to keep their prices fixed, which results to price rigidity.   

These are the six features of the oligopoly market which describes the oligopoly meaning in economics and oligopoly characteristics.

Price and Output Determination under Oligopoly

Product differentiation is based on the type of industry and determination of price and output, in case of oligopoly market. Which can be understood by the different models. Here is the differentiation of products in an oligopoly:

  1. Oligopoly market have few sellers and selling identical or homogeneous products and having powerful influence on the whole market, the price and output policy of each is likely to affect the entire industry; therefore they will try to promote collusion.
  2. If the industry has the differentiation of products, an oligopoly market can increase or decrease its price without the fear of losing customers or comebacks from his rivals. 

Price Determination 

In case of oligopoly, not a single theory explains the oligopoly market behaviour regarding price and output in the market. Theories like, Cournot Duopoly Model, Bertrand Duopoly Model, Chamberlin Model, the Kinked Demand Curve Model, the Centralised Cartel Model, Price Leadership Model, etc., determines about the price determination in oligopoly and each theory have their own particular set of assumptions. 

PRICE DETERMINATION MODELS OF OLIGOPOLY

 Kinky Demand Curve

 According to the, kinky demand curve model there are not frequent   changes in the market prices in case of non-collusive oligopoly market.   Assumption in case of demand curve is that kink in the curve is at ruling price. Because, of the firm’s significant share of the product, and a powerful influence on the price of the commodity. Under oligopoly, a firm has two choices:

  1. Increases the price: In an oligopoly market, every firm is very aware of the fact that raises the price of the product, will make the firm lose most of its customers to its rival. The upper part of the demand curve is more elastic than the part of the curve lying below the kink.

     2.  Decrease the price: Fall in the prices, increases the total sales, but it              doesn’t push up sales very much because the rival firms starts                        cutting  down their prices as well.

 

Therefore, oligopoly firms do not believe in cutting prices, and tries to maintain the constant prevailing market price. Quality and advertisement are the bases of competition in the oligopoly market.

Graph Explanation
Kinky Demand Curve
Kinky Demand Curve

In the above given graph, just below the point corresponding to the kink there is a discontinuity in MR curve. Because, of firms equilibrium at output ON and where MC curve is intersecting the MR curve the discontinuity of MR cost curve is drawn. 

Further explanation of kinky demand curve is in the following diagram:

Kinky Demand Curve
Kinky Demand Curve

   

The demand curve is made up of two segments DB and BD’. The kinked is at the point B on demand curve. 

Oligopoly firm  set the price of output is 10 per unit, and sells 120 units of production. Afterwards, prices are increased to 12 per unit, it gives loss to the firm (large part of the market), and sales of the firm is 40 units which cause a loss of 80 units. 

 Price Leadership Model

Price leadership model, in oligopoly market all the firms follow the price of price leader in the industry and this role is assumed.  The other firms in the oligopoly market follow the price leader and accept the price.

Price leader of the industry is usually the firm which has the dominance over the market or having lowest cost of production in the industry. This is the conclusion of price war in which one firm emerges as the winner.

In most cases of oligopoly market price are set with the agreements among the firms and these agreements can be either tacit or explicit.

Types of Price Leadership 

There are many different types of price leadership. The following are the principal types:

  • The price leadership of a dominant firm: Firm which produces the products in bulk. It sets the price, and the rest of the firms accept this price.
  • Barometric price leadership: The price leadership of an old, experienced and the largest firm assumes the role of a leader, but also undertakes to protect the interest of all firms instead of promoting its interests as in the case of price leadership of a dominant firm.
  • Exploitative or Aggressive price leadership: one big firm built its supremacy in the market by following aggressive price leadership. It compels other firms to follow it and accept the price fixed by it. In case the other firms show any independence, this firm threatens them and coerces them to follow its lead.
Price Determination under Price Leadership 

Determination of price under a price-leadership model based on certain assumptions regarding the behaviour of the price leader and his followers. In the following case, there are few assumptions for determining price-output level 

  • There are only two firms, A and B and firm A’s cost of production is lower than firm B.
  • The product is homogeneous or identical so that the customers are indifferent as between the firms.
  • Both A and B have an equal share in the market, i.e., they are facing the same demand curve, which will be half of the total demand curve.
price under a price-leadership model
price under a price-leadership model

In the above diagram, MCa is the marginal cost (MC) curve of firm A and MCb is the MC curve of firm B. Firm A’s cost of production is lower than firm B.

  • Firm A will be maximising its profit by selling ON level of output at price MP because at output OM the firm A will be in equilibrium as its marginal cost is equal to marginal revenue at point E. 
  • Whereas the firm B will be in equilibrium at point F, selling ON level of output at price NK, which is higher than the price MP. 
  • Two firms have to charge the same price to survive in the industry. 
  • Therefore, firm B has to accept and follow the price set by firm A. This shows that firm A is the price leader and firm B is the follower.

Because both firms face same demand curve, B produce OM level of output. And, MC of B> MC of A. Therefore,  firm B earns less profit than A.

Difficulties of Price Leadership

The following are the challenges faced by a price leader in oligopoly market:

  1. It is difficult for a price leader to assess the reactions of his followers correctly.
  2. The rival firms may secretly charge lower prices when they find that the leader set unduly high prices. Such price-cutting devices are rebates, favourable credit terms, money-back guarantees, after delivery free services, easy installment sales, etc.
  3. The rivals may indulge in non-price competition. Such non-price competition devices are a massive advertisement and sales promotion.
  4. The high price set by the price leader may also attract new entrants into the industry, and these new entrants may not accept his leadership.

The Advantages of an Oligopoly

Here are some advantages of oligopoly market structure for the firms in the industry, customers and to the economy. Oligopoly firms are highly competitive which results these advantages: 

Advantages of an Oligopoly
Advantages of an Oligopoly
  1. High Profits

Due to the presence of few firms in the industries, firms are able to earn huge amount of profits. Demand of products which are sold by oligopoly firms are high and in general these goods are needed or wanted by the large majority of the population.  

      2. Simple Choices

Since there limited number of firms in oligopoly market, it makes it convinent for the consumers compare between them and choose the best option for you. It is not possible in any other kind of market, as competition among sellers is based on features and advertisment of product.

      3. Competitive Prices

There are only few firms in the market which makes consumer able to compare the prices of different firms. Due to this reason firms make sure to keep their prices low as much as possible. As a result, consumer gets the product in lowest prices.

      4. Better Information and Goods

In oligopoly market, price competition and product competition is equally important. Every firm focuses on pursuing the consumer by new and different features, every time company comes up with new thing in the market. Ti gives the consumer best information about the product. 

The Disadvantages of Oligopoly Market

A oligopoly market is also not always beneficial. It has disadvantages to the economy, consumers, and to the firm as well.

         1 .Difficult To Forge A Spot

In oligopoly market huge or big companies have the control over the entire market.  Because of this any new or small businesses with new ideas cannot break into the marketplace. 

         2. Fewer Choices

Number of firms are limited in case of oligopoly which becomes a disadvantage for consumer. In many cases consumer has to choose for the firm which is least evil in the case of providing services. As the choices are  minimum.

         3.Fixed Prices Are Bad For Consumers

As discussed before price in oligopoly is fixed with the mutual understanding between the firms and neither of the firms indulge in reducing prices. As it can result in the price war. Ultimately, it causes consumer to pay high price.

         4. No Fear Of Competition

Firms who control the market are big corporation firms and they are very settled in their business. Profits and their way of running the firm guarantees the results. which finishes the fear of competition.

Oligopoly Market Examples In India

Here are the few real life oligopoly market examples in India. Here is the list of industries which are good examples oligopoly market structure:

  • Cable Television Services
  • Entertainment (Music and Film)
  • Airlines
  • Mass Media
  • Pharmaceuticals
  • Computers & Software
  • Cellular Phone Services
  • Smart Phone and Computer Operating Systems
  • Aluminium and Steel
  • Oil and Gas
  • Automobiles

Oligopoly market Examples In World

Top three oligopoly market examples in the world. Industries considered as the most oligopolistic firms

Technology Industry 

The computer technology sector shows us the best example of oligopoly. Let us list out the computer operating software, and we will find out the two prominent names Apple and Windows. They both have the majority of the market share for long. Other player is the Linux Open Source. Apart from three, there are hardly any players in this sector as they command almost 100 % of the global market share. Regardless of the brand  of computer, operating system will always be sure from any of those described above three. 

Media Industry

Let us take the media sector in the US, where 5-6 players are capturing almost 90% of this sector. And,  10% share is captured by the other small firms who command the chunk of viewership which includes the likes of Viacom, Disney, Time Warner, NBC. The charge for operating rates and usage terms is significant. And it terms of prime time programming and content selection, there is also considerable unity.

Aluminium

Aluminium industry has the undoubtedly the highest Technical and economic concentration. Top 6 big companies, Alcoa, Kaiser and Reynolds from US, Alcan from Canada and Pechiney and Alusuisse from Europe, controls the industry in period of Second World War to the 1970s. They had  more than 60% of world output.And they control the 50% of the ore extraction capacity and smelting capacity is 70% , and 66% of its refining capacity.

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