Oligopoly

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Oligopoly

Postby Anup V » Fri Jul 13, 2012 12:49 am

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). The word is derived from the Greek oligo 'few' plus -opoly as in monopoly and duopoly. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other.

Characteristics of an Oligopoly Market

• Few sellers offering similar or identical products
• Interdependent firms
• Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost
• There is a tension between cooperation and self-interest.

There is no single theory of how firms determine price and output under conditions of oligopoly. If a price war breaks out, oligopolists will produce and price much as a perfectly competitive industry would; at other times they act like a pure monopoly. But an oligopoly usually exhibits the following features:

1. Product branding: Each firm in the market is selling a branded (differentiated) product

2. Entry barriers: Significant entry barriers into the market prevent the dilution of competition in the long run which maintains supernormal profits for the dominant firms. It is perfectly possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on market prices and output

3. Interdependent decision-making: Interdependence means that firms must take into account likely reactions of their rivals to any change in price, output or forms of non-price competition. In perfect competition and monopoly, the producers did not have to consider a rival’s response when choosing output and price.

4. Non-price competition : Non-price competition s a consistent feature of the competitive strategies of oligopolistic firms.

The Indian oil & gasoline industry is an oligopoly. An oligopoly is a market form in which a market or industry is dominated by a small number of sellers. The word is derived from the Greek for few sellers. Because there are few participants in this type of market, in this case we have four major govt.owned oil companies and one private company (Reliance).Each oligopolist is aware of the actions of the others. The decisions of firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion.

Reference :

Financial Express Newspaper.

http://www.google.com

http://www.wikipedia.com

“Microeconomics “ by BERNHEIM & WHINSTON
Anup V
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