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Oligopoly is a market form in which there are only a small number of sellers (oligopolists). The word is derived from the Greek word “oligoi” meaning “a few” and “polein” meaning “to sell”. As there are only few sellers in the market, it is highly likely that each seller is aware of the other sellers. The decision that one takes will definitely influence or be influenced by the competitors in the market. Strategic planning is an essential trait in oligopoly.
It is a common form of market that we see. A good example of oligopoly in the U.S. is the petroleum industry and the automobile industry. This type of competition gives rise to wide range of different outcomes. In some situations, the firms may employ restrictive trade practices like collusion and market sharing, etc to raise prices and restrict production in much the same way as monopoly.
Features of Oligopoly:
• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.
• Ability to set price: Oligopolies are price-makers rather than price-takers.
• Entry and Exit: Barriers to entry are high. The most important barriers are economies to scale, patents, access to expensive and complex technology and strategic actions by incumbent firms designed to destroy new firms.
• Number of firms: A handful of sellers. There are so few firms that actions of one firm will influence the actions of others.
• Long run profits: Oligopolies can retain long run abnormal profits. High entry barriers prevent other firms from entering the market to capture the excess profit.
• Product differentiated: Products may be standardized or differentiated.
The oligopolistic industries, like other industries passes through a number of stages- introduction, growth, maturity and decline. The industry’s sales grow rapidly in the introduction stage, less rapidly in the growth stage and even less rapidly in the during the maturity stage. The sales fall rapidly in the decline stage.
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