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Reasons for the Existence of Oligopoly (7 Reasons)

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There are certain reasons which have led to the emergence of oligopoly. These are:

1. Large Investment of Capital:

The number of firms in an industry may be small due to the large requirements of capital.

No entrepreneur will like to venture to invest large sums in an industry in which addition to output to the existing one may likely to depress prices.

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Further, the new entrant may also fear of provoking a price-war by the established firms in the industry. This is always true that in the midst of differentiated product, it is difficult to make a new product.

2. Control of Indispensable Resources:

A few firms may control some indispensable resources which may enable them to secure several advantages in costs over all others. This enables them to operate profitably at a price at which others cannot survive.

3. Legal Restriction and Patents:

In public utility sector, the entry of new firms is closely regulated through the grant of certificate by the state. This policy of exclusion of rivals may be due to diseconomies of small scale or of duplication of services. Another factor for the emergence of oligopoly is the patent right which a few firms acquire in matter of some goods. Patents have led to many of the most important industrial monopolies in America and elsewhere.

4. Economies of Scale:

Another factor responsible for emergence of oligopoly is the large scale firm. In some industries, a few firms can meet the entire demand for the product. It is possible that the demand may be satisfied by a large number of firms, while small firms cannot secure the economies of large scale production. In those industries where there is a lot of mechanization and where economies of large scale are considerable a few firms will survive.

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The firms attain such a huge size that a few of them can satisfy the entire demand. For example, automobiles, steel industry, petroleum etc. Oligopolies are also found in local markets. In small towns, a few firms may be sufficient to satisfy the demand, e.g., petrol, banks, building material suppliers etc. The market is small and therefore can be satisfied by a few firms.

5. Superior Entrepreneurs:

In some industries there may be some superior entrepreneurs whose costs are lower than inferior rivals. These entrepreneurs under sell and eliminate most of their rivals.

6. Mergers:

Many oligopolies have been created by combining two or more independent firms. The combination of two or more firms into one firm is known a merger. The main motives of mergers include increasing market powers, more resources, economies of scale and market extensions etc.

7. Difficulties of Entry into the Industry:

Lastly, oligopoly may come to exist because of difficulties of entry into the industry. One big difficulty in some industries is the large requirements of capital. Businessmen do not like to venture into those industries entry to which, even of one firm, is likely to depress prices to such an extent as to make it unprofitable for all. They may also be afraid of the price war that their entry may provoke from the established firms in the industry. Prospective entrants to an industry are also deterred by the difficulty of marketing new products or new brands in the presence of already well- established, well entrenched brands.

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