Market Structure - Oligopoly

The Term Oligopoly

has been derived from
two Greek words.
Oligi which means few
and Polien means
sellers.

Oligopoly is a market structure featuring a

small number of sellers that together account
for a large fraction of market sales.

 Oligopoly is often described as Competition

among few.
When the products of a few sellers are
homogenous it is known as Pure Oligopoly
When the products of few sellers are
differentiated , but close substitutes of each
other it is known as Differentiated
Oligopoly .

Sources of Oligopoly
Factors that give rise to oligopoly are :
Huge capital investment
Economies of scale.
Patent rights
Control over certain raw materials
Merger and takeover.

1.

2.

Few Sellers : An oligopoly market is characterized

by a few sellers and their number is limited .

Oligopoly is a special type of imperfect market. It has
a large number of buyers but a few sellers.

Homogeneous or Differentiated Product : The

Oligopolists produce either homogenous or

differentiated products. Products may be
differentiated by way of design , trademark or
service

3. Interdependence : The most important feature of the

Oligopoly is the interdependence in decision making of
the few firms which comprise the industry.
The reactions of the rival firms may be difficult to guess.
Hence price is indeterminate under Oligopoly.
4. High Cross Elasticities : The cross elasticity of demand
for the products of oligopoly firms is very high. Hence
there is always the fear of retaliation by rivals.
Each firm is conscious about the possible action and
reaction of competitors while making any change in
price or output

5. Importance of Advertising and Selling

costs : Oligopolistic firms have to employ various

aggressive and defensive marketing weapons to gain
greater share in the market or to maintain their
share.
Hence, the firms incur a good deal of costs on
advertising and other measures or sales promotion .
Firms in Oligopoly market avoid price cutting and try to
compete on non-price basis. This is because if they
start under-cutting one another, a type of price war
will emerge which will drive a few of them out of the
market .

6. Competition : Competition is unique in an

oligopoly market. It is a constant struggle
against rivals.

7. Group Behaviour : Each Oligopolist closely

watches the business behaviour of other
Oligopolists in the industry and designs his
moves on the basis of some assumptions of
their behaviour .

9. Uncertainty : The interdependence of other

firms for ones own decision creates an
atmosphere of uncertainty about price and
output

10. Price Rigidity : In an oligopoly market each

firm sticks to its own price to avoid a possible
price war. The price remains rigid because of
constant fear of retaliation from rivals.

Game Theory
Game theory helps us understand oligopoly
and other situations where players interact
and behave strategically.
Dominant strategy: a strategy that is best
for a player in a game regardless of the
strategies chosen by the other players
Prisoners dilemma: a game between
two captured criminals that illustrates
why cooperation is difficult even when it is
mutually beneficial 10
OLIGOPOLY

Prisoners Dilemma Example

The police have caught Bonnie and Clyde,

two suspected bank robbers, but only have enough
evidence to imprison each for 1 year.
The police question each in separate rooms,
offer each the following deal:
If you confess and implicate your partner,
you go free.
If you do not confess but your partner implicates you,
you get 20 years in prison.
If you both confess, each gets 8 years in prison.

OLIGOPOLY

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Prisoners Dilemma Example

Confessing is the dominant strategy for both players.
Nash equilibrium:
Bonnies decision
both confess
Confess

Confess
Clydes
decision

Bonnie gets
8 years
Clyde
gets 8 years
Bonnie goes
free

Remain
silent Clyde
gets 20 years
OLIGOPOLY

Remain silent

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Bonnie gets
20 years
Clyde
goes free
Bonnie gets
1 year
Clyde
gets 1 year

Prisoners Dilemma Example

Outcome: Bonnie and Clyde both confess,
each gets 8 years in prison.
Both would have been better off if both
remained silent.
But even if Bonnie and Clyde had agreed
before being caught to remain silent, the logic
of self-interest takes over and leads them to
confess.
OLIGOPOLY

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CONCLUSION

Oligopolies can end up looking like

monopolies or like competitive markets,
depending on the number of firms and how
cooperative they are.
The prisoners dilemma shows how difficult it
is for firms to maintain cooperation, even
when doing so is in their best interest.
Policymakers use the antitrust laws to regulate
oligopolists behavior. The proper scope of
these laws is the subject of ongoing
controversy.
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