Oligopoly is an important form of imperfect competition. Oligopoly is said to prevail when there are a few firms or sellers in the market producing or selling a product. When there are two or more than two, but not many producers or sellers of a product, oligopoly is said to exist. Oligopoly is also often referred to as “Competition among the Few”. There is no borderline between ‘few’ and ‘many’, but when the number of sellers of a product are two to ten, oligopoly situation is said to exist. When products of a few sellers are homogeneous, it is the situation of Pure Oligopoly.
Prof. George J. Stigler defines oligopoly as, ” That situation in which a firm bases its market policy in part on the expected behaviour of a few close rivals.”
William Fellnser refers to it as, ” Competition among the few”.
(a) Monopoly Power The first characteristic of an oligopoly firm is its monopoly power. The Oligopoly firm does not have absolute monopoly because it is not the only firm to constitute the industry. But in the case of its market conditions and some of its business practices, the oligopoly firm has a monopolistic character.
(b) Interdependence Under oligopoly, a firm cannot take independent price and output decisions. Since the number of competitive firms is limited, therefore each firm must keep in mind the reactions of the rival companies. The price and output decisions of an oligopoly firm has a great impact on the price and output decisions of the rival companies.
(c) Indeterminate Demand Curve The interdependence of firms makes their demand curve indeterminate. When a firm lowers the value, other firms also cut their prices. That’s why the firm cannot be certain about the demand of its product. Thus, the demand curve facing an oligopolistic firm loses its certainty and is thus uncertain because it constantly changes due to the reaction of the rival companies.
(d) Role of Selling Costs Advertising plays a big role in the monopolistic competition market compared to other market systems. A large expenditure is required on advertising and sales promotion techniques to maintain and increase current market share.
(e) Conflicting attitude of firms At times, the firms realize the disadvantage of mutual competition and desire to combine together to maximize their joint profits. The tendency, at such times, is towards collusion to serve their common interests. After some time, dissatisfaction of one firm or the other, may lead to competition, including cut-throat competition. Thus, two conflicting attitudes are at work under oligopoly-one of cooperation and united action and the other of conflict and antagony.
(f) Lack of Uniformity Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms do not confirm to standard size. Some may be small, others very large.
(g) Price RigidityAnother important feature of oligopoly with product differentiation is the existence of price rigidity under it. Prices tend to be rigid under oligopoly. If a firm introduces a price cut, the Customers of rival firms are attracted towards it. The rival firms will retaliate by cutting down their prices. Thus, a price war will ensue which will benefit none.
