The Oligopolistic Market

Oligopoly is the form of market organization in which there are few sellers of a community. If there are only two sellers we have duopoly. If the product is homogenous (e.g. steel, cement, copper) there is pure (or standardized) oligopoly. If the product is differentiated, there is a differentiated oligopoly. Oligopoly seems to be the most prevalent form of market organization in the manufacturing sector of modern economies and arises for the same general reasons as monopoly (i.e. economies of scale, control over source of raw material, patents and government franchise). Since there are only few large-scale sellers of a product in a market, firms are aware of the mutual interdependence of sales, production, investment and adverting plans. Hence manipulation by any firm of variables under control is likely to evoke retaliation from competing firms. The market is dominated by a few sellers; at least several of which are large enough relative to the total market to be able to influence the market price. As a result, oligopolists usually engage in non-price rather than price competition. The important feature of oligopoly is that each individual firm can affect market price. The interdependence of the firms in the industry is the single most important characteristics of oligopoly and sets it apart form other markets structures. This interdependence is the natural results of fewness. That is, since there are few firms tin the oligopolistic industry, when one of them lowers its price, undertakes a successful advertising campaign, introduces a better model, the demand curved faced by other oligopolists shift down. So the other oligopolists react. How they will react vary from one oligopolist to another; there is no general theory of oligopoly. All we have are specific cases or models. Oligopolists usually compete on the basis of quality, product design, customer’s services and advertising (i.e. non-price competition). The reason that they do not engage in price competition is their fear of triggering a price war. Specifically, by lowering its price an oligopolist could significantly reduce the sales of other firms in the industry and prompt them to retaliate with an even greater price reduction chess or poker- playing and military strategy. Oligopoly is synonymous with big firms and includes a group of giant firms each of which keep a watchful eye on the actions of the other. It is under Oligopoly that rivalry among firms takes most direct and active firm. Here one encounters such actions and relations as the frequent introduction of new products, free samples, and aggressive- if not downright nasty- advertising campaigns. One firm’s price decision is likely to elicit a cry of pain from its rivals and firms are engaged in continuing battle in which strategies are planned day by day and each major decision can be expected to induce a direct response.