The term oligopoly has been derived from two Greek words, oligoi means few and poly means control.
According to Prof. George J. Stigler, “Oligopoly is a market situation in which a firm determines its marketing policies on the basis of expected behavior of close competitors.”
Oligopoly refers to a market form in which there are few sellers selling either in homogeneous or differentiated products and there is a large number of buyers. For example – Aviation and Telecommunication industries in India.
Each firm has a significant share of the market. Price and output decision of one firm significantly impacts the price and output of decisions of the rival firms in the market. There is a high degree of interdependence among the competing firms, Price and output policy of one firm depends on the price and output policy of the other’s.
Features of Oligopoly
1. Small Number of Big Firms or Sellers and a large number of Buyers
In oligopoly, there is a few firms which are producing either homogeneous or differentiated products.
If firms produce homogeneous products, for example – cement, concrete, and bricks, the industry is said to be pure or perfect oligopoly.
In case of differentiated products, for example – automobile, the industry is known as differentiated or imperfect oligopoly.
2. Sells Homogeneous or Differentiated Products
3. Price is Not Uniform
Because of the product differentiation, firms can fix higher prices for their products, this gives the firms partial control over price, it also helps firms to create brand loyalty. Brand loyalty can be achieved by advertising and providing better products than their competitors.
4. Advertising Costs
Under oligopoly firms have other competitors, producing nearly substitutes, so the firms have to do a lot of advertising to increase their market share and brand loyalty, this increases the prices of the products.
5. Partial control over Price
6. Entry Barriers
There are barriers to entry of the new firms. These barriers can be of different types such as patent rights, very high initial capital investment, full control over raw material resources of existing firms etc.
7. Imperfect Knowledge – No one in the industry knows all about the firms and the quality of their products.
8. Factors of production are not perfectly Mobile
9. Firms Demand Curve can’t be Specified , because there is no specific relationship b/w price and quantity demanded.
10. High Degree of interdependency in Decision Making
The market share of each firm is so significant that it affect the price and output policy of the other firms significantly, so there is a very high degree of interdependence among the competing firms.
This kind of interdependence makes it very difficult to specify the any relationship between the price and quantity demanded. So it is not possible to draw a specific demand curve for an oligopoly firm.
11. Non-Price Competition
Firms under oligopoly tends to avoid price competition. Non-price competition helps firms to establish brand loyalty, Greater the the brand loyalty, higher the market share, higher the control over the price.
12. Firms under oligopoly Earns Extra-Normal Profits or Abnormal Profits in the Long Run (AR>AC) mostly by forming groups and fixing high prices for their products.