There is, therefore, a good deal of interdependences of the firm under oligopoly. It has a two-fold benefit where they can collectively achieve greater economies of scale, as well as reduce the competition. These firms require strategic planning to consider the reactions of other participants existing in the market. The word is derived from the Greek for few sellers. Interdependence of Firms: Under perfect competition there are so many small firms and no single firm is strong enough to influence price or output. There are four major theories about oligopoly pricing:. Alternatively, oligopolies can see fierce competition because competitors can realize large gains and losses at each other's expense.
Differentiated products, advertising is often important Most common market structure Firms in Oligopoly There are different possible ways that firms in oligopoly will compete and behave this will depend upon: The objectives of the firms e. Advertising is unnecessary under perfect competition, since every firm can sell any amount of his product at the going price without any sales promotion efforts on account of perfect knowledge on the part of the buyers. The exact number of firms is not defined. Another example is the global market for sports footwear — 60% of which is held by Nike and Adidas. There is a high degree of uncertainty regarding which variable or combination of variables, the rival firm will use in its reaction pattern, in response to change in price, product variation and selling activities by the first firm. For example, if a new firm tries to enter a hypothetical telecommunications market it will have to compete against the already existing brand names, set-up a manufacturing unit without any initial sales or income from the business, and will also need to come up with innovative production techniques to sustain itself in the long run.
Small businesses in an oligopolistic market fail to establish themselves as a brand because most of the market is captured by larger firms. By The important difference between the model of an oligopoly and the model of a perfectly competitive market is that firms in oligopoly can influence market outcomes. An example of monopolistic competition is the market for cereals. There are so few firms that the actions of one firm can influence the actions of the other firms. In this situation although demand of the oligopolist making the first move will increase as he lowers his price, the increase itself would be much smaller than in the first case.
Oligopoly is a market situation in which the number of sellers dealing in a homogeneous or differentiated product in small. In such a case it acts in its sphere as a monopolist in lining price and output. This means that every strategy that they do, they must take into consideration the possible reactions of the rival firms. However, it is not always easy to measure accurately the incremental sales arising from a specific advertising campaign. Article shared by Some special characteristics are found under oligopoly, which distinguish it from other market forms.
In some circumstances, we can see oligopolies where firms are seeking to cut prices and increase competitiveness. Thus, every firm remains alert to the actions of others and plan their counterattack beforehand, to escape the turmoil. If any firm does a lot of advertisement while the other remained silent, then he will observe that his customers are going to that firm who is continuously promoting its product. Interdependence means that actions of one firm affect the actions of other firms. This will lead to a situation of price war which benefits none. Firms differ considerably in size.
For example, setting up a manufacturer of aircraft costs a lot of money for specific plants and equipment. Firms compete for market share and the demand from consumers in lots of ways. We make an important distinction between price competition and non-price competition. This gives them a certain degree of market power which allows them to charge higher prices within a certain range. This includes measuring the market share in percentage for the top four largest firms in a particular industry. Even though some companies would infuse huge capital in performing the start-up of their venture, but the most important criterion is their brand image and reputation in the industry. Advertising : With high cross-elasticity of demand for the product under oligopoly, the oligopolist can raise his sales through non-price competition either by advertising his product or by improving its quality.
Natural barriers to entry generally arise on account of economies of scale. There is no generally accepted theory of group behaviour. An oligopoly is a market dominated by a few producers. Merging of two or more competitors helps them to act as one dominant entity in the market. Since there is no other competitor to fear from, the sellers will use their status of dominance and maximize their profits. No firm, therefore, can take independent action without considering the reactions of other firms.
A promotional campaign is profitable if the marginal revenue from any extra sales exceeds the cost of the advertising campaign and marginal costs of producing an increase in output. It can be also due to Government's policies on entry and exit. The first major reason could be the immediate move by other firms in the industry. However, oligopoly is best defined by the conduct or behaviour of firms within a market. The ongoing interdependence between businesses can lead to implicit and explicit collusion between the major firms in the market. So, oligopoly lies in between monopolistic competition and monopoly. Profit maximization conditions: An oligopoly maximizes profits.