Oligopoly market form is probably of greatest importance in today’s economy. However, it is one of the most complex markets on account of price indeterminateness and absence of a well defined specified goal. Interdependence of firms, uncertainty about rival’s policies and scepticism about the profit maximising goal make it impossible to arrive at determinate price-output solution under oligopoly.
The quantity of output that an oligopolist sells depends on the prices charged by other firms. Unless these prices can be specified in advance, oligopolist can not know the demand for his product. Thus, the demand curve for an oligopolist is in the nature of conjectures, which keeps shifting, as the rivals continue to react to price changes by one firm.
Economic well-being and behaviour of firms under oligopoly is mutually interdependent on account of fewness of firms. If an oligopolist firm decides to reduce the price, the demand curves of the rival firms will shift down. The firm cannot assume that its rival firms will keep their prices and quantities constant, when it makes changes in its price.
Image Source: cdn.shareyouressays.com
ADVERTISEMENTS:
Since the course of action taken by one firm to benefit it is harmful to the others, they will react to their advantage. However, there are many possible behavioural patterns of the rivals to action by one firm. These firms may lower their prices by smaller, equal or greater amount.
Under these circumstances, the demand for the product of the oligopolist making the first move may rise substantially, marginally or may even decrease in the three cases respectively. But, the actual response of the rivals is almost impossible to know making individual firm’s demand curve and hence the marginal revenue curve as indeterminate.
As a result, the firms cannot apply the marginalist principle (MC=MR) to achieve profit maximisation. Further, given the characteristics of an oligopoly market structure, firms rather prefer to follow alternative goals such as sales maximisation, balanced growth, long run survival with stable profits, entry prevention, retention of a constant market share, satisfying shareholders, etc.
ADVERTISEMENTS:
Thus, uncertainty about the reaction patterns of strategic competitors poses a serious analytical difficulty in the way of providing a single determinate solution or general theory under oligopoly.