Price and Output Decision under Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers.

With few sellers, each oligopolists is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by the decisions of other firms.

MEANING OF OLIGOPOLY:

DEFINITION OF OLIGOPOLY:

Oligopoly is defined as a market structure in which there are a

few sellers selling homogeneous or differentiated products.

A situation in which a particular market is controlled by a small

group of firms. 

In which only one company exerts control over most of a market.

In an oligopoly, there are at least two firms controlling the market.

In this there are two parts i.e..

Homogeneous Oligopoly

Heterogeneous Oligopoly

1. Huge Capital Investment

2. Economies of scale

3. Patent rights

4. Control over certain raw material

5. Merger and Takeover

SOURCES OF OLIGOPOLY

1. Huge Capital Investment

Some industries are by nature capital-

intensive, e.g., manufacturing automobiles, aircraft, ships,

TV sets, computers, mobile phones, refrigerators, steel and

aluminum goods, etc. such industries require huge initial

investment.

2. Economies of Scale:

By virtue of huge investment and large scale production, the large

units enjoy absolute cost advantage due to economies of scale in

production, purchase of industrial inputs, market financing, and scale

organization.

3. Patent rights:

In case of differentiated oligopoly, firms get their differentiated

product patented which gives them an exclusive right to produce and

market the patented commodity. This prevents other firms from producing

the patented commodity.

4. Control over certain raw materials:

where a few firms acquire control over almost the entire supply of

important inputs required to producing a certain commodity, new firms

find it extremely difficult to enter the industry.

5. Merger and takeover:

Merger of rival firms or takeover of rival firms by the bigger ones

with view to protecting their joint market share or to put an end to waste of

competition is working in modern times, as an important factor that gives

rise to oligopolies and strengthens the oligopolistic tendency in modern

industries.

FEATURES OF OLIGOPOLY

Small number of sellers.

There is a small number of sellers under oligopoly.

How small is the number of sellers in oligopoly markets is difficult to specify precisely for it depends largely on the size of the market.

Industry no. of firms Total market share(%)

Ice-cream 4 100.00

bread 2 100.00

Milk food 6 99.95

Motor-cycles 5 99.95

Passenger cars 5 94.34

cigarettes 4 99.90

Fruit juice 10 98.21

Automobile tyres 8 91.37

Interdependence of decision making.

It is most striking feature of an oligopolistic market structure.

Due to few firms under oligopoly brings the firms in keen competition with each other.

The competition between the firms takes the form of action, reaction and counter-action in the absence of collusion between the firms.

Barriers to entry.

Barriers to entry to an oligopolistic industry arise due to market condition such as:

Huge investment to match the production capacity of existing firms.

Economies of scale and absolute cost advantage enjoyed by the existing firms.

Strong consumer loyalty. Preventing the entry of new firms.

• Indeterminate price and output.

Another important feature of the oligopolistic market structure is the indeterminateness of price and output.

The characteristic fewness and interdependence of oligopoly firms makes derivation of the demand curve a difficult proposition.

Continued…

• Therefore price and output are said to be indeterminate under collusive oligopoly. But, there too, collusion may last or it may break down.

• If price is once determined, it tends to stabilize.

REFERENCES

Managerial economics 7th edition

D N Dwivedi published 2008 CMIE, industries and market share. august 2000. http://www.yourarticlelibrary.com/oligopoly-

market/the-oligopoly-market-example-types-and-features-micro-economics/9140/

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