“oligopoly”: Competition Among the Few

There are different types of market orientation in different geographies and for different products or verticals. It can be perfect competition or monopolistic or may be a duopoly. But in the reality, probably the most important and common nature of competition and the market structure is “Oligopoly“.. can also be defined as “Competition Among the Few”.

Defining loosely, oligopoly is a good example of imperfect competition. It is said to prevail, once there are few firms or sellers in the market, selling or producing the same type of product line. Although there is no borderline to describe few and many, but we can consider the number of firms in an oligopolistic situation between two to ten. By the nature of product, oligopoly can be of two types, pure oligopoly, where sellers sell almost similar type of product and differentiated oligopoly, where firms are in the same line of business but products are not absolutely homogeneous.

In an oligopoly, some exciting market features and characteristics are found which are not present in the other market forms. Following are some of them:

1. Interdependence: The most important feature of oligopoly is the interdependence in decision-making of the firms in the market. This is because, when the number of competitors is few, any change in price, output or product features etc. by a firm causes direct effects on the fortune of its rivals, which will again change the business policies of the other firms. So it’s a fact that in oligopoly market situation, market demand is not the only force which can cause product pricing or packaging change, but also the cut-throat competition that a firm faces from its rivals. This proves that Interdependence is a very important factor to determine the solution to price-output fixation.

2. Importance of Advertisement and Selling Cost: A direct effect of interdependence of the oligopolists is that the different firms have to employ various aggressive and defensive marketing weapons to gain a greater share in the market or to prevent a fall in that share. According to Prof.Baumol, “…it is only under oligopoly that advertising comes fully into its own”.

3. Group Behaviour: Another important feature of oligopoly is that, for its proper solution analysis of group behavior is important. Theories of perfect competition, monopoly or monopolistic competition pose no difficult problem of making suitable assumptions about human behavior. In case of perfect competition or monopolistic competition, firms run after profit maximisation and amongst the huge number of firms in the market there is absolutely no scope of interdependence. Again in monopoly, theories deal with a sole individual and it is appropriate to consider that there does not exist any kind of interdependence.