Oligopolistic Market

What Is An Oligopolistic Market?

By Rupal Jain

The word OLIGOPOLY is derived from the Greek word oligos which means few.

Wikipedia defines Oligopolistic Market as a market characterized by a small number of producers who often act together to control the supply of a particular good and its market price.

It is dominated by a few large suppliers who are interdependent on each other, before making any pricing and investment decisions. It is also explained as a market condition in which sellers are so few that an action of any one of them will materially affect price and have a measurable impact on competitors; in other words; since there are few participants in this type of market, each Oligopolist is aware of the actions of the other.

OPEC is an example of Oligopoly since few countries control the production of oil, the steel and the automobile industry in United States of America is another example.

The Key characteristics of an Oligopolistic Market are as follows: -

• It is a market dominated by a small number of participants who are able to collectively exert control over supply and market prices.

• Few firms sell branded products which are close substitutes of each other.

• Entry barriers for the other firms are high; the barriers can be due to patents, copyrights, government rules / regulations or ownership of scare resources.

• Firms are interdependent for decision making.

• Products can be homogenous (standardized) or heterogeneous (differentiated).

• The sellers are the price makers and not price takers, since the few sellers mutually dominate the pricing decisions.

• The sellers can achieve supernormal profits in the long run.

• The sellers can achieve economies of scale; since for the large producers as the level of production rises, the cost per unit of products decreases; thus ensuring higher profits.

• There is high degree of market concentration, since the four-firm concentration ratio is often used, where the market shares of four largest firms are measured (as a percentage) since they form the major portion of the market share.

An Oligopolist faces a downward sloping demand curve; however; the price elasticity depends on the rival¡¦s reaction to change its price, investment and output.

The firm uses Game Theory, in this method the firms takes into account the decisions/strategies of the competitors before deciding their strategies. The different forms of Oligopoly are: -

1. Duopoly: - A Duopoly, is a simple form of Oligopoly in which only two firms dominate a market. e.g.:- Pepsi and Coke, Cadbury and Schweppes.

2. Oligopsony: - In Oligopsony, there are few buyers and large number of sellers. The other characteristics are same as Oligopoly.

3. Bilateral Oligopoly: - A market with a few sellers (oligopoly) and a few buyers (Oligopsony) is referred as Bilateral Oligopoly.

4. Cartel: - When there is a formal agreement among the Oligopolist for a collusion (to increase prices and restrict production in the same way as a monopoly) with an objective to reduce risk and foster joint profit it is termed as Cartel.

Written By: Rupal Jain, Lecturer, Atharva Institute of Management Studies (MUMBAI) She can be reached at  jainrupal@sify.com