Oligopoly : Definition and Classification of Oligopoly!
The term ‘Oligopoly’ is coined from two Greek words ‘Oligoi meaning ‘a few’ and ‘pollein means ‘to sell’.
It occurs when an industry is made up of a few firms producing either an identical product or differentiated product.
In simple words, “Oligopoly is a situation in which there are so few sellers that each of them is conscious of the results upon the price of the supply which he individually places upon the market”-The number of sellers is greater than one, yet not big enough to render negligible the influence of any one upon the market price.
The concept of oligopoly can be defined as under:
“Oligopoly is that situation in which a firm bases its markets policy in part on the expected behaviour of a few close rivals.” – J. Stigier
“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.” – PC. Dooley
“Oligopoly is a market structure characterized by a small number of firms and a great deal of interdependence.” -Mansfield
“An oligopoly is a market situation in which each of a small number of interdependent, competing producer’s influences but does not control the market.” – Grinols
“Oligopoly is a market situation in which number of firms in an industry is so small that each must consider the reaction of rivals in formulating its price policy.” – McConnel
Classification of Oligopoly:
Oligopoly situation can be classified on different bases:
1. Basis of Product Differentiation:
On the basis of product differentiation, oligopoly may be classified as Pure or Perfect Oligopoly and Imperfect or Differentiated Oligopoly. In the case of pure oligopoly, the product of different firms in the industry is identical or homogeneous while in the case of differentiated oligopoly, the products of different firms are not identical but rather differentiated products. Thus, differentiated oligopoly will exist where the competing firms produce products which are close substitutes but not perfect substitutes.
The distinction between pure oligopoly and differentiated oligopoly does not play a significant role in the analysis. In real situation, firms in most oligopolistic industries produce differentiated products. But theoretically we may determine price and output in both kinds of oligopoly.
2. Basis of Entry of Firms:
On the basis of the possibility of entry of new firms into the industry, oligopoly may be classified as Open Oligopoly and Closed Oligopoly. An open oligopoly provides full freedom to new firms to enter into the industry. In the situation of open oligopoly there is no restriction of any kind for the desiring firms to enter into the market. A closed oligopoly, on the other hand, refers to that market situation where only the few firms control the entire market and new firms are not allowed to enter the industry.
3. Basis of Price Leadership:
On the basis of presence or absence of price leadership, oligopoly may be classified as Partial Oligopoly and Full Oligopoly. Partial oligopoly refers to that market situation where the industry is dominated by one large firm (known as the leader) and the other firms (known as the followers) of the industry follow the price policy determined by their leader. Full oligopoly, on the other hand, refers to that market situation where there is no leader and no followers.
4. Basis of Agreement:
On the basis of agreement, oligopoly is classified as Collusive Oligopoly and Non-collusive Oligopoly. A collusive oligopoly refers to that market situation where the firms of the industry follow a common policy of pricing. In other words, they combine together to avoid competition among themselves regarding the price and output of the industry. A non- collusive oligopoly refers to that market situation where there is no agreement among the firms regarding the price and output of the entire market. In other words, the firms under non-collusive oligopoly act independently.