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Determination of Prices

Oligopoly

By now, you are already aware of three market forms – perfect competition, monopoly, and monopolistic competition. However, in the real world economies, most industries are oligopolistic.  In this article, we will look at the types of oligopoly and characteristics of an Oligopoly.

Oligopoly

Oligopoly is a form of imperfect competition and is usually described as the competition among a few. Hence, Oligopoly exists when there are two to ten sellers in a market selling homogeneous or differentiated products. A good example of an Oligopoly is the cold drinks industry. In India, there are a handful of firms who manufacture cold drinks. These firms sell homogeneous as well as differentiated products in the market.

Types of Oligopoly

Pure or Perfect

One of the types of oligopoly is the perfect oligopoly. This occurs when the product is homogeneous in nature (e.g. Aluminum industry).

Differentiated or Imperfect

Another of the types of oligopoly is an imperfect oligopoly. This occurs when product differentiation exists (e.g. Talcum powder industry).

Open and Closed

  • Open – New firms can enter the market and compete with existing firms.
  • Closed – Entry into the market is restricted.

Collusive and Competitive

  • Collusive – This occurs when few firms come to an understanding with respect to the price and output of the products.
  • Competitive – This occurs when there is a lack of understanding between the firms and they invariable compete with each other.

Partial or Full

  • Partial – This occurs when one large firm dominates the industry. Also, this firm is the price leader.
  • Full – This occurs when there is no price leadership in the market.

Syndicated and Organized

  • Syndicated – The situation where the firms sell their products through a centralized syndicate.
  • Organized – The situation where the firms create a central association to fix prices, quotas, output, etc.

Characteristics of Oligopoly Market

Types of Oligopoly

(Source: oecd.org)

1. Interdependence

The interdependence in the decision-making of the few firms that make the industry is the most important characteristic of an oligopolistic market. This is important because, when the competitors are few, if a firm makes a small change in price, output, etc., it can have a direct impact on its rivals.

In retaliation, the competitors might change their own prices, output, etc. too. Hence, it is important for firms to consider the impact of the major decisions they take on the market as well as the other firms in the industry.

2. Importance of advertising and selling costs

Due to interdependence, firms have to employ aggressive and defensive marketing techniques to gain a bigger share of the market. Hence, firms incur a lot of costs in marketing and promotional activities.

Therefore, in an oligopolistic market, advertising and selling costs have great importance.

Usually, firms from such a market avoid price cutting and try to compete on the non-price factors. If they start under-cutting one another, soon a price-war can emerge, driving some firms out of the market.

3. Group Behavior

The crux of oligopoly is group behaviour. If an oligopolist assumes profit-maximizing behaviour, then he goes against the fundamentals of an oligopolistic market.

However, there is no generally accepted theory of group behaviour. Some questions that require answers are:

  • Do the members of a group agree to pull together in the promotion of common interest or do they fight to promote their individual interests?
  • Does the group have a leader?
  • If yes, how does he get others to follow him?

However, one thing as certain – each firm closely observes the behaviour of other firms in the industry. If then designs its moves based on the observation.

Solved Question on Types of Oligopoly

Q1. In types of oligopoly, Pure oligopoly is based on the _____________ products

  1. differentiated
  2. homogeneous
  3. unrelated
  4. none of the above

Answer:

According to the definition, pure or perfect oligopoly occurs when the product is homogeneous in nature. Hence, the correct answer is option b.

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