CONCEPT – OLIGOPOLY

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CONCEPT – OLIGOPOLY

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• What it is: Oligopoly is a market situation where a few firms control the supply of a commodity. These firms are oligopolists. The competing firms are large enough to be able to control the total industry output. Root words are Greek olígos "few" + poleîn "to sell“.
• How created: Oligopolies are created by some type of a collusion, thereby reducing competition and leading to higher prices for consumers. With few sellers, each oligopolist is likely to be aware of the actions of the others, as per Game Theory.  Strategic planning by oligopolists needs to take into account the likely responses of the other market. Entry barriers include high investment requirements, strong consumer loyalty for existing brands and economies of scale.
• Most prevalent where: Oligopoly is the most prevalent form of market organisation in the manufacturing sector and arises due to various reasons such as economies of scale, patents and trademarks, control over the sources of raw materials, government’s sanction, need for large capital, etc.
• Types of Oligopolies: We find two types primarily.

1. Pure Oligopoly: The oligopolists sell practically homogeneous products. Examples : Steel, copper, cement petrol and a few other industries.
2. Differential Oligopoly: Here, a few firms sell similar but not identical products under the same conditions. Examples: Auto, tyres, electrical appliances, cigarettes, etc. In other words, in an Oligopoly market, a firm either produces Homogeneous product (pure oligopoly), or Heterogeneous products (Imperfect or Differentiated Oligopoly).

• Features of oligopolistic markets:

1. Few Sellers: Sellers are few, and the customers are many. Few firms dominating the market enjoy considerable control.
2. Interdependence: Each seller has to be cautious with respect to any action taken by the competing firms.
3. Advertising: Firm advertise more to increase their market share.
4. Competition: An intense competition exists among the sellers.
5. Entry and Exit Barriers: The firms can easily exit but not enter such markets.
6. Lack of Uniformity: There is a lack of uniformity among the firms in terms of their size, some are big, and some are small.

• Types of oligopolistic markets:

1. Open Vs Closed Oligopoly: On the basis of freedom to enter into the new industry
2. Partial Vs Full Oligopoly: On the basis of price leadership. Partial Oligopoly refers to the market situation, wherein one large firm dominates the market and is looked upon as a price leader.
3. Perfect (Pure) Vs Imperfect (Differential) Oligopoly: On the basis of product differentiation. The Oligopoly is perfect or pure when the firms deal in the homogeneous products.
4. Syndicated Vs Organized Oligopoly: On the basis of a degree of coordination found among the firms. When the firms come together and sell their products with the common interest is called as a Syndicate Oligopoly.
5. Collusive Vs Non-Collusive Oligopoly: On the basis of agreement or understanding between the firms. In Collusive Oligopoly, instead of competing with each other, the firms come together and with the consensus of all fixes the price and the outputs. Example : OPEC

• Examples:

1. Computer firms: Intel and AMD are the only two major players in desktop CPU market worldwide. Microsoft, Sony, Valve, and Nintendo dominate the video game platform market. Nvidia and AMD together make most of the chips for discrete graphics.
2. Financial markets: Three credit rating agencies (Standard & Poor's, Moody's, and Fitch Group) dominate their market and extend their crucial importance into the financial sector. Credit card processing is dominated by Visa and Mastercard. The accountancy market is dominated by PriceWaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu, and Ernst & Young (commonly known as the Big Four).
3. Aviation market: Boeing and Airbus have a duopoly over the airliner market. General Electric, Pratt and Whitney and Rolls-Royce plc own more than 50% of the marketshare in the airliner engine market

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