The Term Oligopoly has been derived from two Greek words Oligi which means few and

Polien means sellers. Thus Oligopoly is an abridged version of monopolistic competition . It is a competition among few big sellers each one of them selling either homogenous or hydrogenous products. Feller defines Oligopoly as Competition among the few In an Oligopolistic market the firms may be producing either homogenous products or may be having differentiation in a given line of production Meaning of oligopoly Oligopoly refers to a market situation where there r a few sellers (2 to 10) in a market, selling homogenous or differentiated products. 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 Characteristics of oligopoly market Few Sellers : An oligopoly market is characterized by a few sellers and their number is limited . (usually not more than 10) 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

Interdependence

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 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 Importance of Advertising and Selling costs direct effect of interdependence of the Oligopolistic firms is that they have to employ various aggressive and defensive marketing weapons to gain greater share in the market or to maintain their share Hence, the firms will have to 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 undercutting one another, a type of price war will emerge which will drive a few of them out of the market as the customers will try to buy from the seller who is selling at the cheapest price Competition Competition is unique in an oligopoly market. It is a constant struggle against rivals Different size The size of firm in an oligopoly market. It is a constant struggle against rivals 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 . Uncertainty The interdependence of other firms for ones own decision creates an atmosphere of uncertainty about price and output 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.

VARIOUS FORMS OF OLIGOPOLY Because of interdependence , an oligopolistic firm cannot assume that its rival firms will keep their quantities constant when it makes changes in price or quantity. When an oligopolistic firm changes its prices, its rival firms would retaliate and change their prices which in turn would affect the demand of the former firm Oligopoly can be classified into several forms. Some of the important forms of Oligopoly are as follows Perfect and Imperfect Oligopolies If the product of the rival firm are homogenous then it is Perfect Oligopoly, if the product are differentiated it is Imperfect Oligopoly Open and Closed Oligopolies If entry is open to new firms it is termed as Open Oligopoly, and if entry is strictly restricted it is termed as Closed Oligopoly. Collusive Oligopoly If the firms under oligopoly market combine together instead of competing it is known as Collusive Oligopoly. The collusive may take place in the form of a common agreement or an understanding between the firms Partial and Full Oligopoly Partial oligopoly is formed when the dominant firm which is the price leader and all other firms follow the price of the price leader. If no firm acts as a price leader then it is called Full Oligopoly. PRICE AND OUTPUT DECISION IN A OLIGOPOLY MARKET Because of interdependence , an oligopolistic firm cannot assume that its rival firms will keep their quantities constant when it makes changes in price or quantity. When an oligopolistic firm changes its prices, its rival firms would retaliate and change their prices which in turn would affect the demand of the former firm Economists have

established a number of price-output models for Oligopoly market, depending upon the behaviour pattern of the members of the group. A few important ones are as follows

Avoidance of Interdependence Some economists have interdependence disappears from decision making the demand curve facing the oligopolist becomes determinate Price Leadership Another approach is that the firms in an Oligopoly would accept one firm as a leader and would follow him in setting prices. Such a leader firm may be dominant or low-cost firm producing a very large proportion of the total production and having a great influence over the market Price Wars Some economists assume that an oligopolist is able to predict the counter moves of his rivals, and they provide a determinant solution to the price and output problem

Game Theory In the theory of games, the oligopolistic firms does not guess at its rivals reaction pattern, but calculates the optional moves by rival firms. It calculates their best possible strategies and in view of that adopts its policies and counter moves Non-price competition Since the oligopolists face the danger of retaliation in price cut competition, they resort to non-price competition. This can take the from of advertising, sales promotion , improvement of the product etc

Secret Price Concessions

Since an open price cut is retaliated by rivals, some oligopolists offer secret price concessions for selected buyers From the above analysis it is clear that there is no single determinant solution to the price output fixation under Oligopoly. The fixing of price under oligopoly market situation is very difficult