OLIGOPOLY

Defination:
“An oligopoly is a market of only a few sellers, offering either homogeneous or differentiated products. There are
so few sellers that they recognize their mutual dependence”.
Homogenous and Differentiated oligopoly:
In a homogeneous oligopoly the major firms produce identical products, such as steel bars or aluminum ingots.
Prices tend to be uniform in homogeneous oligopolies. In a differentiated oligopoly, similar but not identical
products are produced. Examples include the automobile industry, the cigarette industry, and the soft drink
industry. In differentiated oligopolies companies attempt to differentiate their products from those of their
competitors. To the extent that they are able to establish differentiated products, companies may be able to
maintain price differences. Characteristics of Oligopoly

Characteristics of Oligopoly:

1-Few firms
Under Oligopoly, there are a few large firms although the exact number of firms is undefined. Also, there is severe
competition since each firm produces a significant portion of the total output.

2-Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry like patents,
licenses, control over crucial raw materials, etc. These barriers prevent the entry of new firms into the industry.

3-Non-Price Competition
Firms try to avoid price competition due to the fear of price wars and hence depend on non-price methods like
advertising, after sales services, warranties, etc. This ensures that firms can influence demand and build brand
recognition.

4-Interdependence
Under Oligopoly, since a few firms hold a significant share in the total output of the industry, each firm is affected
by the price and output decisions of rival firms. Therefore, there is a lot of interdependence among firms in an
oligopoly. Hence, a firm takes into account the action and reaction of its competing firms while determining its
price and output levels.

5-Nature of the Product

Under oligopoly, the products of the firms are either homogeneous or differentiated.

6-Selling Costs
Since firms try to avoid price competition and there is a huge interdependence among firms, selling costs are
highly important for competing against rival firms for a larger market share.

7-No unique pattern of pricing behavior

Under Oligopoly, firms want to act independently and earn maximum profits on one hand and cooperate with
rivals to remove uncertainty on the other hand.
Depending on their motives, situations in real-life can vary making predicting the pattern of pricing behavior
among firms impossible. The firms can compete or collude with other firms which can lead to different pricing
situations. .
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8-Indeterminateness of the Demand Curve
Unlike other market structures, under Oligopoly, it is not possible to determine the demand curve of a firm. This is
because on one hand, there is a huge interdependence among rivals. And on the other hand there is uncertainty
regarding the reaction of the rivals. The rivals can react in different ways when a firm changes its price and that
makes the demand curve indeterminate.
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Three Oligopoly Models: There are three distinct pricing models: (1)the kinked-demand
curve,(2)collusive pricing, and(3)price leadership.
1-Kinked-Demand Theory: The kinked‐demand theory is illustrated in Figure and applies to oligopolistic markets
where each firm sells a differentiated product. According to the kinked‐demand theory, each firm will face two
market demand curves for its product. At high prices, the firm faces the relatively elastic market demand curve.

2-Collusive pricing: Collusive oligopoly is a form of market in which few firms form a mutual agreement to avoid
competition. They form a cartel and fix the output quotas and the market price. ... Each firm has its price and
output policy is independent of the rival firms in the market.

3-Price leadership: Price leadership occurs when a pre-eminent firm (the price leader) sets the price of goods or
services in its market. This control can leave the leading firm's rivals with little choice but to follow its lead and
match the prices if they are to hold on to their market share. Price leadership is common in oligopolies, such as the
airline industry.

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Examples of oligopoly:
FAST FOOD INDUSTRY:

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McDonald’s is not considered a OLIGOPOLY since it is not a single seller of a good or one that is unique.
McDonald’s is one of the leading companies in the fast food industry, both in the U.S and internationally. It is one
of the leading companies in selling burgers along with Burger King, KFC, and others. These facts show how
McDonald’s is considered an oligopoly, as it is one of the few firms dominating the industry it is in.
McDonald’s is one of the many firms that are under the economies of scale. There are many barriers of entry to
get into the hamburger industry and market. McDonald’s has along-run average total cost that decreases
whenever the size of the firm or operations increase. While others are buying franchises, McDonald’s is lowering
their average total cost by expanding the size of their firm. This allows McDonald’s to make it harder for new
entries to make it into the fast food industry.
McDonald’s use a key component known as interdependence to rely on the actions of other businesses. Strategic
dependence is rather common in the fast food industry. McDonald’s does this so they can predict the movements
of other businesses. By predicting their movements, McDonald’s is able to make a strategy to become and stay
successful.
Other Industries which are examples of oligopolies include:
1-Cable Television Services
2-Entertainment (Music and Film)
3-Airlines
4-Mass Media
5-Pharmaceuticals
6-Computers & Software
7-Cellular Phone Services
8-Smart Phone and Computer Operating Systems
9-Aluminum and Steel
10-Oil and Gas
11-Automobiles