Oligopoly is an important form of imperfect competition. Oligopoly is said to prevail when there are few firms or sellers in the market producing or selling a product. Oligopoly is referred to as “competition among the few”. The simplest case of oligopoly is duopoly.
When there are two or more than two, but not many, producers or sellers of a product are there then oligopoly is said to exist. Numerically when the numbers of sellers of a product are two to ten then oligopoly is said to exist.
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There are two types of oligopoly like (1) oligopoly without product differentiation or pure oligopoly and (2) oligopoly with product differentiation (products are not homogeneous) and products are close substitutes of each other. It is known as differentiated oligopoly.
1. Interdependence:
Under oligopoly, the decision-making of the few firms is interdependent. As the numbers of firms are less in number, any change in price and output of a firm will have a direct effect on other rival firms.
Other firms will also change the price and output decision. Here a single firm before changing its price and output of the product will think twice. Individual firm will take into account the reaction of other firms when any action is taken by the individual firm.
2. Advertising and selling costs:
Under oligopoly firms go for aggressive and defensive marketing weapons to get a bigger share in the market. So firms go for advertisement for sales promotion. Under perfect competition no such sales promotion measures are necessary. Under oligopoly advertising becomes a life-and-death matter. Firms failing to keep up advertising will lose the customers.
3. Group behaviour:
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Theory of oligopoly is a theory of group behaviour. Under oligopoly as we know there are few firms in a group which are interdependent. Group jointly can decide to go for common interest or each seller may fight for its own gain or they may form a cartel to pursue promotion of common gain and sharing of gain or they may select a leader and all firms will follow the price and output decision of the leader set by the leader. The pricing policy or the price set by the leader will be accepted by other firms.
4. Indeterminateness of demand curve:
Another feature is indeterminateness of the demand curve facing an oligopolistic. As there are few firms and there is interdependence of the firms, a single firm should not think that other rival firms will not change their prices when the individual firm makes changes in its own price.
So there is no definiteness of demand curve faced by an individual firm under oligopoly. Here any change in the price of the product of a single firm creates reaction in other firms to change their prices accordingly. So no individual firm can access its demand in the context of change in price.