A Detailed Note on Oligopoly

The meaning of oligopoly is a market where several companies or sellers keep certain homogeneous products or differentiated products captive. In other words, an oligopoly is a state of the market where the industry has a few types of products or a few firms that dominate the market, or industry. This affects the parameters of the market, which includes costing. An individual firm can decide the cost of their products, and this decision affects the entire market. In an oligopoly, every individual firm has control over the market and its prices. To be up to the mark and ahead of other firms, individual firms have to compete with each other.

Types of Oligopoly

Oligopoly is of two kinds mainly: homogeneous oligopoly and heterogeneous (differential) oligopoly. 

A homogeneous oligopoly is a firm or industry that sells or produces similar or homogeneous products. For instance, the steel industry has the same or similar products. Therefore, the steel industry can be classified as a homogeneous oligopoly. 

A heterogeneous oligopoly is also known as a differentiated oligopoly. In a heterogeneous oligopoly, the firms produce nearly similar products as in a homogeneous oligopoly, but the products differ according to specific parameters. For example, the cosmetics industry produces similar products but they market these products in a way that displays its superiority over its competition. In this manner, companies try to gain a better standing in the market by introducing different features of their products.

Characteristic Features of an Oligopoly

These are the characteristic features of an oligopoly:

Number of firms

The primary characteristic of an oligopoly is that it has to have several firms that rule the market. If there is only one firm, it will become a monopoly, if there are two firms, it will become a duopoly, and if there are many companies, it will become a perfect competition. So in an oligopoly market, there should be a few firms or companies. 

Interdependent firms

The second characteristic of an oligopoly is that the firms are interdependent. For instance, if a company changes the prices of its products, then the other companies will also have to change their prices to beat the competition. Similarly, companies have to know the special features of other companies’ products to make similar products and market them. If a company fails to do this and moves ahead along with the market, it may undergo a loss. 

Advertise

The third characteristic of an oligopoly is that companies have to advertise their products. In a monopoly, people know there is only one company for a certain type of product, so there is no advertising required. In a duopoly, advertising focuses on the different features of a company’s products. In an oligopoly, in addition to advertising the different features, companies also have to advertise themselves so the general public knows who they are. The more a company advertises its products, the more it will be ahead of their competition. 

Exit and entry of firms

The fourth characteristic of an oligopoly is the entry and exit of firms. Exiting from an oligopoly market is easy compared to entering an oligopoly market. There are several barriers that a new company might face while entering the market. Companies that are already a part of the market may prevent the entrance of other companies. This happens because as the number of companies increases in the market, the profit margin will decrease, and the competition will increase. These barriers can be in the form of government policies, licences, patents, high capital requirements, complex technology, and more. 

Lack of uniformity

The fifth feature of an oligopoly is the lack of uniformity. One such example is that firms can be of different sizes. This means that in an oligopoly, it is not necessary for all firms to be the same size. 

Competition

The sixth characteristic is competition. This is very evident in an oligopoly. Since the number of firms is less in an oligopoly, compared to perfect competition, the competition is intense.

Group behaviour 

The seventh feature is group behaviour. This means that as a company changes its features or product prices, others will follow. 

Conclusion

Oligopoly is a type of imperfect market competition. It is imperfect because the sizes of the companies are not the same. Moreover, any change in the way an individual company operates will change the market. This is called the group behaviour of companies. It is difficult for a new company to enter into an oligopoly market as either governments or firms issue certain restrictions.