Oligopoly is a particular type of market structure which is characterised by a few sellers and large number buyers. It must be mentioned here that the word ‘few’ does not indicate any specific numerical value.
The products or services sold under oligopolistic market structure can be homogeneous or heterogeneous. When oligopolists sell homogeneous products, it is called pure oligopoly and if they sell heterogeneous products, it is referred to as heterogeneous or differentiated oligopoly.
Perhaps differentiated oligopoly is the most common of all market structures. All the white goods manufacturing companies belong to differentiated oligopoly. For example, the refrigeration market of India includes only a few firms like Carrier, LG, Samsung, Voltas, Hitachi, Blue Star, Whirlpool, etc.
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Similarly, in India, the car market also comprises of a few companies like Maruti, General Motors, Toyota, Mitsubishi, Honda, Ford, Hyundai, Fiat, Hindustan Motors, Telco etc.
In oligopoly, each firm makes pricing and output decisions keeping in mind the possible response of rival firms. This interdependence is a unique characteristic of oligopoly. Under perfect competition, any firm can sell as much as it can at the prevailing market price.
Besides, under perfect competition, supply of each firm is assumed to be so small in comparison to the total market supply that even if it increases or reduces his own supply, total supply in the market does not get affected.
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But under oligopoly, only a few firms cater to the entire market demand either by selling identical product(s) or slightly different products. So, if one firm increases or decreases its market share, say by large-scale advertising, without any change in other factors, it is sure to affect market share of its competitors.