The word oligopoly is derived from the Greek word "oligo" meaning few and "polo" meaning to sell; which means a market with a few sellers (producers). The reasons for few sellers in the market for a particular product are it needs large investments for establishment, similarly in products, customers are sensitive for price changes and heavy competition in its segment though sellers or few Oligopoly consists of characteristics of various other markets.
To understand about the oligopolistic market we can take the laptops companies, tractors, computer pen drive companies, cellular network providers and car companies (industry) or else satellite TV companies, are the best examples for oligopoly market. Here we take DTH (Direct To Home) services as the best example in this industry as it contains few sellers. Eg:- Tata Sky, Airtel TV, Sun Direct and Jio TV
Example companies in oligopolistic market
2. Sony vaio
4. Hewlett Packard
Cellular Phone service providers. :- Jio, Airtel, Idea & BSNL.
satellite TV Channel service providers : Tata Sky, Airtel TV, Sun Direct and Jio TV
Bike Companies. etc : TVS motors, Hero Motors, Bajaj Motors, Honda Motors, and Yamaha.
Characteristics for oligopolistic market
All producers produce same type of product.
All the company’s products are closely related (having similarities) to each other. There won’t be much difference between all the products. As we don’t find much difference between the products like example all the laptops.
All products prices under the oligopolistic market will have similar price. There will not be much difference in between the prices of products.
All the companies’ products performance and working style will be in similar way.
Example All the laptop companies use almost similar components; there is no much difference between components for one laptop company to other laptop company and also in performance and working style.
Batteries perform in same manner.
Processor in the computer performs in the same manner.
Basing on the above line, very high competition exists in this market condition. Because all products under the categories of the oligopolistic market are closely related. Customer buying decision mostly will be based on price of the products
Companies spend more for the marketing (advertising) of its products because of high competition in the market to sell their products.
New company entering into oligopolistic market is not so easy, requires huge amount of investment because of the nature of companies need high investment to start and high competition.
Causes of Oligopoly:
Economies of Scale: The firms in the industry, with heavy investment, using improved technology and reaping economies of scale in production, sales, promotion, etc, will compete and stay in the market.
Barrier to Entry: In many industries, the new firms cannot enter the industry as the big firms have ownership of patents or control of essential raw material used in the production of an output. The heavy expenditure on advertising by the oligopolistic industries may also be a financial barrier for the new firms to enter the industry.
Merger: If the few firms in the industry smell the danger of entry of new firms, they then immediately merge and formulate a joint policy in the pricing and production of the products. The joint action of the few big firms discourages the entry of new firms into the industry.
Mutual Interdependence: As the number of firms is small in an oligopolistic industry, therefore, they keep a strict watch of the price charged by rival firms in the industry. The firm generally avoids price ware and try to create conditions of mutual interdependence.
Price determination under oligopoly
To understand this type of market situation, it needs to have an idea about the demand concept which is discussed in the above chapters.
Here we can observe the demand curve in the bending shape. It is called as the kinky demand curve. There is a logical reason for the kinky demand curve.
In the oligopolistic market situation. At certain price P all the companies will be ready to sell its (cell services) products Q. When one company plans to increase its price to P1 to increase its returns (profits). So, We can observe that demand fall from Q to Q1. Showing the small raise in price from P to P1, causing more fall in demand. In other words, small raise in price caused more fall in demand. The reason is, when one company increase its product price in small amount to increase the profits, other companies don’t raise price and maintain same price. So the customers don’t buy the product which price is high, and all customers move to purchase other company products where there is low price.
If one company tries to increase small amount of demand from Q to Q2 compared with other companies. It should reduce more prices, from P to P2. The reason behind this situation is, when one company reduces small amount of price to increase its demand; other companies immediately do the same, so one cannot increase their demand. The only one option to the company is to reduce more prices from P to P2 which others companies can’t do the same, to increasing the small amount of demand from Q to Q2. It’s not so easy to reduce more prices which lead to great loss.
This situation is call price war situation. In this competitive situation every company needs to spend more on advertising cost to sell their products. Entry of new companies should face the severe competition from existing companies.
The above sited explanation can be practically applied to the cellular GSM service providing companies.
Price and Output Determination under Oligopoly:
(a) If an industry is composed of few firms each selling identical or homogenous products and having powerful influence on the total market, the price and output policy of each is likely to affect the other appreciably, therefore they will try to promote collusion.
(b) In case there is product differentiation, an oligopolist can raise or lower his price without any fear of losing customers or of immediate reactions from his rivals. However, keen rivalry among them may create condition of monopolistic competition.
There is no single theory which satisfactorily explains the oligopoly behaviour regarding price and output in the market. There are set of theories like Cournot Duopoly Model, Bertrand Duopoly Model, the Chamberlin Model, the Kinked Demand Curve Model, the Centralised Cartel Model, Price Leadership Model, etc., which have been developed on particular set of assumptions about the reaction of other firms to the action of the firm under study.