Some special characteristics are found under oligopoly, which distinguish it from other market forms. Main features of oligopolistic market are discussed here.
1. Few Dominant Firms:
Under oligopoly, few large sellers dominate the market for a product. Each seller has sizeable influence on the market.
Every firm possesses a large degree of monopoly power (when products are differentiated) and accounts for a large part of market’s total demand. It uses all resources at its disposal to counter the actions of rival firms to ensure its survival and growth in the market. Thus, each firm acts as a strategic competitor.
Image Source: cdn.shareyouressays.com
2. Mutual Interdependence:
ADVERTISEMENTS:
As the number of firms is small, each (sizeable) firm has to consider the actions and the possible reaction of rivals, while taking business decisions as to its price, output or promotion. This will enable the firm to know how the buyers of its product will react to any such change.
On one hand, every firm is in a position to influence the price, output and profits of other firms in the market. On the other hand, it cannot fail to take into account the reactions of other firms to its price and output policy. Therefore, there is a good deal of interdependence of the firms under oligopoly.
Successful decision making depends on the prediction of the reactions of the rival firms to the policy decisions of the firm. Further, each firm wants to keep its own decision to be as unpredictable as possible to rivals. Since more than one reaction-pattern is possible from other firms, we must make assumption about the reaction of others before providing certain and determinate solution of price-output fixation under oligopoly.
ADVERTISEMENTS:
Thus, oligopolistic market situation is characterised by mutual interdependence in policy making, where interdependence is recognised by all the firms. Suppose, a firm starts a massive advertising campaign or designs a new model of his product, which captures the market.
This policy change on the part of the firm will have obvious and immediate effect on its competitors. The competitors are likely to react with counter policies to avoid drifting off of its customers to other firms. Now, the former firm may have to react.
This process of action-reaction of the firms may continue in an unending phase of uncertainty. Since, behaviour of at least some of the competitors depend on firm’s own behaviour, this must be taken care of, when decisions are made by the firm.
Further, to play the game of moves and countermoves, the oligopolists have to be equipped with both the aggressive and defensive marketing weapons. For example, a few years back, the Times of India offered the newspaper at an invitation price of Rs. 1.50 on week days.
ADVERTISEMENTS:
The other national dailies were forced to make downward revisions in their price policy. Furthermore, later the Hindustan Times started offering the newspaper at Rs. 1 on weekdays as a mark of celebration of its 75 years of service.
Other newspapers responded by matching the price reduction. Similarly, serving of Coke as the ‘official drink’ in the Cricket World Cup provoked its competitor Pepsi to come up with the advertisement ‘nothing official about it.’
3. Indeterminate Demand Curve:
The element of interdependence of firms has made the systematic analysis of oligopoly very difficult. The mutual interdependence also makes predictions and hence optimal decision very difficult due to the atmosphere of uncertainty. No firm under oligopoly is in a position to visualise the consequences of its price-output policy with any degree of accuracy.
There is a high degree of uncertainty regarding which variable or combination of variables, the rival firm will use in its reaction pattern, in response to change in price, product variation and selling activities by the first firm. A wide variety of behaviour patterns becomes possible.
Even if they decide to get together and enter into an agreement in the pursuit of their objectives (so far as the law allows), it may last or it may break down. Two conflicting attitudes on the part of the firms operate in the market.
Sometimes, the firms realise the disadvantages of mutual competition and tend to collude to maximise their joint profits. At other times, the desire of each firm to earn maximum profits may reflect conflicts among the firms.
No firm under oligopoly faces a determinate demand curve on account of interdependence and uncertainty. The demand curve of the oligopolist keeps shifting as rival firms react to changes made by this firm. If one firm changes its price, the demand for its product will depend on how its rivals change their prices.
In this game of uncertainty, the firm has no alternative, but to guess how the rival will react to its move and at the same time, the firm has to conceal from the rival, and how it will react to the move of the latter. In this way, the oligopoly market situation can be compared to a game of cards, where a player does not know in advance the cards the other players hold and conceals his own cards from others.
4. Barriers to Entry:
Unlike monopolistic and perfect competition, where there are no barriers to entry, oligopolist firms are characterised by the presence of strong barriers to entry. These barriers to entry may be natural or fancied. Natural barriers to entry generally arise on account of economies of scale. The demand conditions in the market may be such that only a few big firms can operate successfully. Heavy initial investment requirement and ownership of strategic resources with no close substitutes may be other causes restricting entry of new firms.
Further, patents, trademarks, tariff, quota, licensing, other Government regulations and product differentiation create artificial barriers to entry in the oligopolistic market. Firms can earn profits in the long-run due to these barriers to entry.
5. Advertising:
With high cross-elasticity of demand for the product under oligopoly, the oligopolist can raise his sales through non-price competition either by advertising his product or by improving its quality. Both these tools shift the demand in favour of the product and increase the market share of an oligopolist firm.
The oligopolist may resort to aggressive advertising to sweep the market. However, the rival firms will remain vigilant about the moves of the firm taking intiative and will start defensive advertising.
Advertising is an important and a powerful marketing weapon under oligopoly. In the words of Baumol “it is only under oligopoly that advertising comes fully into its own”. According to him, advertising is a matter of life and death under oligopoly.
Under monopolistic competition also, advertising plays an important role, but not as much as under oligopoly. A monopolist needs advertisement only to inform and attract potential customers, who have not yet tried his new product.
He never indulges in competitive advertisement, as there are no other sellers to react. Advertising is unnecessary under perfect competition, since every firm can sell any amount of his product at the going price without any sales promotion efforts on account of perfect knowledge on the part of the buyers.
6. Group Behaviour:
It is necessary to understand the group behaviour of the firms comprising the oligopoly, i.e., whether the firms will cooperate to promote common objectives or compete against each other. There is no generally accepted theory of group behaviour.
Unlike other market forms, the behaviour of a firm is unpredictable under oligopoly due to various reasons. First, the firms constituting the group may not have a common objective. Secondly, the firms may enter into formal or informal collusion to achieve profit maximisation goal by avoiding uncertainty and ruinous rivalry. Finally, the group may be dominated by a leader.