Oligopoly: Features

1. Introduction

An oligopoly is a market structure characterized by a small number of large firms that dominate an industry. These firms have significant market control and are interdependent, meaning their pricing and output decisions directly affect competitors.

Oligopoly exists in industries where economies of scale, brand loyalty, and high investment requirements prevent small firms from entering. Due to limited competition, firms often engage in strategic pricing, advertising, and non-price competition to maintain market dominance.

2. Features of Oligopoly

(i) Few Large Firms Dominate the Market

• The market is controlled by a small number of firms, each holding a significant share.
• These firms are large enough that their decisions directly influence market prices and competitor behaviour.
• Example: Automobile industry (Toyota, Honda, Ford) and telecom industry (Jio, Airtel, Vi).

(ii) Interdependence Among Firms

• Unlike perfect competition, firms cannot make decisions independently.
• A change in price, output, or marketing strategy by one firm immediately affects competitors, leading to reactionary adjustments.
• Example: If Jio reduces its mobile data rates, Airtel and Vi must follow or risk losing customers.

(iii) High Barriers to Entry

• Oligopolies are difficult for new firms to enter due to:
  • High capital investment requirements (e.g., automobile manufacturing, airline industry).
  • Government regulations and licensing (e.g., telecom spectrum licenses).
  • Brand loyalty and economies of scale, give existing firms a competitive edge.

(iv) Price Rigidity and Kinked Demand Curve

• Prices in oligopoly markets remain stable for long periods, even if market conditions change.
• Kinked demand curve theory explains why:
  • If a firm raises its price, competitors do not follow, leading to lost customers.
  • If a firm lowers its price, competitors match the reduction, leading to a price war and lower profits for all.

(v) Non-Price Competition

• Since price wars reduce profits, oligopolistic firms compete through advertising, branding, quality improvements, and product differentiation.
• Examples:
  • Smartphones (Apple vs. Samsung emphasize technology & branding).
  • Airlines (Indigo and Vistara compete on service, comfort, and frequent flyer programs).

(vi) Collusion and Price Leadership

• Oligopoly firms may form cartels to control production and pricing, limiting competition and maximizing profits.
• Price leadership occurs when one dominant firm sets the price, and others follow to maintain stability.
• Example: OPEC (Oil Producing Countries cartel) fixes crude oil prices globally.

(vii) Differentiated or Homogeneous Products

• Some oligopolies sell standardized products (e.g., steel, cement, petroleum).
• Others compete through differentiation (e.g., automobiles, electronics, and airline services).

3. Real-world examples of Oligopoly