Oligopoly: Monopoly and Firms

Topics: Monopoly, Oligopoly, Perfect competition Pages: 5 (1524 words) Published: October 8, 2013
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Meaning:- Oligopoly is a common economic system in today’s society. The word “oligopoly” comes from the Greek “oligos” meaning "little or small” and “polein” meaning “to sell.” When “oligos” is used in the plural, it means “few.” Oligopoly is a market structure in which there are a few sellers and they sell almost identical products. A situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market. There are barriers to entry in oligopoly. Oligopoly is characterized by the tension between cooperation and self- interest among these sellers. It is a competition among few big sellers each one of them selling either homogenous or differentiated products. 2 For example:- If the oligopolist firms can cooperate, they can charge a high price and share profits. But if they cannot cooperate and instead they compete because of following their own self-interest, then price goes down and profits decline. In

dustries which are examples of oligopolies include:
Steel industry
Cell phone
Telecom service providers
Internet service providers

In the words of Mansfield “Oligopoly is a market structure characterized by a small number of firms and a great deal of interdependence.” In the words of P.C. Dooley, “ An oligopoly is a market of only a few sellers , offering either homogenous or differentiated products. There are so few sellers that they recognize their mutual dependence.”

The important features of oligopoly are given as follow :
1. Few Sellers
2. Homogeneous or differentiated products
3. Entry is possible but difficult
4. Interdependence
5. Uncertainty
6. Indeterminateness
7. Price rigidity
8. Non price competition
9. Tendency to form cartel
10. Close substitutes
1) Small number of sellers:- There is a small number of sellers under oligopoly. Conceptually, however, the number of sellers is so small and the market share of each firm is so large that a single firm can influence the market price and business strategy of the rival firms Interdependence of . 2) Decision making :-  The competition between the firms takes the form of action, reaction, and counteraction between them. Since the number of firms in the industry is small, the business strategy of each firm in respect of pricing, advertising, product modification is closely watched by the rival firms. 3) Interdependence:- The firms under oligopoly are interdependent in making decision. They are interdependent because the number of competition is few and any change in price & product etc by any firm will have a direct influence on the fortune of its rivals, which in turn retaliate by changing their price and output. Thus under oligopoly a firm not only considers the market demand for its product but also the reactions of other firms in the industry. No firm can fail to take into account the reaction of other firms to its price and output policies. There is, therefore, a good deal of interdependences of the firm under oligopoly. 4) Importance of advertising and selling costs :-The firms under oligopolistic market employ aggressive and defensive weapons to gain a greater share in the market and to maximise sale. In view of this firms have to incur a great deal on advertisement and other measures of sale promotion. Thus advertising and selling cost play a great role in the oligopolistic market structure. Under perfect competition and monopoly expenditure on advertisement and other measures is unnecessary. But such expenditure is the life-blood of an oligopolistic firm.

5) Group behaviour :-Another...
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