The basic features of an Oligopolistic market are:
Under oligopoly, there are only a few sellers who sell either homogeneous or differentiated products. The word few indicates that the number of sellers is more than one (monopoly) but much less than that under monopolistic competition. The idea is that sellers being more than one in number are very powerful in influencing total output and sales in the market and that they may indulge in keen competition such as price cuts in order to boost their individual sales at the cost of the others, unless they enter into some agreement about price and output.
The number of sellers being few, and the fact that they are producing the same or similar product, makes them highly interdependent in respect of decision – marketing. Any decision with regard to price or output change by one will have tremendous impact on the output and sale of the others who may react by making similar changes, thereby affecting the output and sales of the first firm. Thus, while deciding about its price and output policy, each individual firm will have to take into account the reactions and countermoves of the other firms and their effect on its own output and sales.
This means that the oligopolistic firm has to take explicit account of the impact of its decision on competing firms and the policy reactions of those firms and, in turn, the impact of the decisions taken by other firms on its own decisions. It is essentially taking action by anticipating reactions and their consequences is non – strategic. This means the firms in the monopolistic competition base their decisions on their own cost and demand curve without considering the possible reaction of other large number of competitors.
In an oligopolistic market, due to existence of a number of barriers to entry there is no freedom of entry for the new firms as is in case of monopolistic competition. These barriers may arise due to economies of scale enjoyed by the existing firms and their distinct cost advantage over the potential entrants. Further he market may not be large enough so that it is unprofitable for more than a few firms to exit. The existing firms may have complete control over the raw material and input sources, they may have patent rights to production or may have neither the means nor the will to enter. Apart from these natural barriers, the existing firms may take strategic action to deter the entry of new firms. Such action may take the form of flooding the market with goods and cutting the price to make entry of the new firms unprofitable.
The oligopolistic firms may or not differentiate their products. OPEC which is a cartel (association of petroleum exporting countries which is a form of oligopoly) does not much differentiate the oil supplied by various member nations. On the other hand, few car producers in India (which is a type of competing oligopoly) aggressively differentiate their products from others, highlighting special features of their car, which according to them, are not found in cars of rival companies. In such oligopolies, where products are differentiated, selling costs play an important role.
Like monopolistic competition, selling costs, expenditure on publicity, advertisement and other sale promotion activities, is an important feature of oligopoly firms. Every firm seeks to maximize its profits or sales by drawing away customers from other firms and making them buy its products. Aggressive publicity, fabulous discounts, installment sales, loyalty bonus, etc.
Apart from, the above, oligopolistic market may have some more features, there may be price wars, each firm cutting down its price below that of the others and the others in turn doing likewise. There may be collusion or agreement among the firms about common price or output sharing virtually making it a monopoly market. Or there may be keen competition among them and the firms may be trying to fight unto finish. All these features of oligopoly create many problems in the analysis of price and output determination.
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