Introduction
Oligopoly is one of the most common forms of market structure found in the real world. It lies between monopoly and perfect competition. In an oligopolistic market, a few large firms dominate the industry, and each firm’s decisions affect the others. This leads to interdependence in pricing and output decisions. In this answer, we will discuss the major features that define an oligopolistic market structure.
Main Features of Oligopoly
1. Few Sellers
The market is dominated by a small number of large firms. Each firm has a significant share of the market, and their decisions influence the overall market conditions. For example, the automobile industry often has only 4-5 major players in a country.
2. Interdependence
Firms in an oligopoly are highly interdependent. Any change in the price, output, or advertising strategy of one firm will directly affect others. This results in strategic decision-making where firms must consider their competitors’ reactions.
3. Barriers to Entry
There are high barriers to entry for new firms. These could be in the form of high capital requirements, patents, economies of scale, or strong brand loyalty. This keeps the number of firms limited.
4. Non-Price Competition
Firms often avoid price wars and compete through non-price methods like advertising, product quality, packaging, and customer service. This helps maintain prices while increasing market share.
5. Price Rigidity
Prices in an oligopoly tend to remain stable over time. Firms are reluctant to change prices because it could lead to a price war or loss of market share. This price rigidity is often explained by the kinked demand curve theory.
6. Cartel Formation or Collusion
Sometimes, firms in an oligopoly form cartels to reduce competition. They agree on prices, output levels, or market shares to increase profits. However, this is illegal in many countries due to anti-competition laws.
7. Product Differentiation or Homogeneity
Oligopolistic markets may deal in identical products (like steel or cement) or differentiated products (like mobile phones or cars). Differentiation helps firms create a loyal customer base.
8. Importance of Advertising
Due to limited firms and interdependence, advertising plays a crucial role. Firms use aggressive marketing to influence demand and create brand recognition.
9. Uncertainty
Firms often face uncertainty about the behaviour of their rivals. Since each firm must anticipate the actions and reactions of competitors, decision-making becomes complex and strategic.
Examples of Oligopoly
- Automobile industry (e.g., Maruti Suzuki, Hyundai, Tata)
- Telecommunication sector (e.g., Jio, Airtel, Vi)
- Soft drinks industry (e.g., Coca-Cola, Pepsi)
Conclusion
An oligopolistic market is characterised by a few dominant firms, interdependence, barriers to entry, and a preference for non-price competition. The unique features of this structure create both competitive and cooperative behaviours among firms. Understanding these features is important for analysing real-world markets and policymaking.