Oligopoly

Meaning and Features of Oligopoly

Oligopoly is a market structure in which a small number of sellers — few enough that each one is large relative to the market — dominate the industry. "Oligos" is Greek for "few". Familiar examples in India include the automobile industry, cement, steel, civil aviation, and telecom services, each dominated by a handful of large firms. The special case of exactly two sellers is called a duopoly.

The defining features are:

1. Few sellers — small enough in number that, unlike under perfect or monopolistic competition, each firm is fully aware of exactly who its rivals are and how large a share of the market each one holds.
2. Mutual interdependence — this is the single feature that most sharply distinguishes oligopoly from every other market form. Because there are so few sellers, each firm's decisions on price, output, or advertising directly affect its rivals — and each firm knows this, and must factor its rivals' likely reactions into its own decision before making it. A price cut by one large car manufacturer is not a decision it can make in isolation; it must anticipate whether rival manufacturers will match the cut, ignore it, or respond with a price cut of their own.
3. Product may be homogeneous or differentiated — unlike the other three forms, oligopoly does not require any one relationship between the sellers' products. A pure (or perfect) oligopoly sells an essentially identical product (cement, steel), so competition is almost entirely on price and delivery terms; a differentiated oligopoly sells branded, differentiated versions of a broadly similar product (cars, soft drinks, smartphones), so competition is fought on both price and non-price grounds (advertising, styling, features) much as under monopolistic competition — but with far fewer, and far more closely watched, rivals.
4. Barriers to entry — usually significant, though not always absolute: large economies of scale, high capital requirements, control over key technology or raw materials, and (in differentiated oligopoly) strong existing brand loyalty all make it difficult for a genuinely new entrant to break in and be taken seriously by buyers.
5. Indeterminate price and output — because of mutual interdependence, price and output under oligopoly cannot be pinned down by a single, universal rule the way $MR = MC$ pins them down under perfect competition or monopoly; the outcome depends on the specific assumption made about how rivals will react (matching a price cut, ignoring a price rise, colluding openly or tacitly, and so on), and different assumptions genuinely produce different outcomes. This is why oligopoly is often described as having no single, general theory of price determination — only a family of models, each built on a different assumption about rival behaviour.
6. Tendency toward price rigidity. A commonly observed real-world pattern under oligopoly is that prices, once set, tend to stay unusually stable for long stretches, changing far less often than a simple demand-supply model would predict. One standard explanation is that a firm expects a price cut to be quickly matched by its rivals (so it gains little extra market share but earns less on every unit — not worth doing), while a price rise is expected to be left unmatched by rivals (so the firm would simply lose customers to them without any benefit) — leaving each firm with little incentive to change its price in either direction, and a strong incentive instead to compete through non-price means such as advertising, product quality, and customer service.