Oligopoly is a market situation in which there are only a few sellers of a commodity. Under this, each seller can influence its price-output policy.
It is because the number of sellers is not very large and each seller controls a big portion of total supply.
Price-output policy of a firm does affect the rivals. The price which is fixed under oligopoly without product differentiation is indeterminate. In case of differentiated products, monopoly agreements are even less possible.
1. Monopoly Power:
There is a clement of monopoly power in oligopoly. Since there are only a few firms and each firm has a large share of the market. In its share of the market, it controls the price and output. Thus an oligopoly has some monopoly power.
2. Interdependence of Firms:
Under perfect competition there are so many small firms and no single firm is strong enough to influence price or output. So the firms do not care about the actions and reactions of other firms. Under monopoly, the question of interdependence of firms does not arise because there is one single firm in the market.
Under oligopoly, there are only a few firms, each producing a homogeneous or slightly differentiated product. Since the number of firms is small, each firm enjoys a large share of the market and has a significant influence on the price and output decisions. Thus, there is interdependence of firms. No firm can ignore the actions and reactions of rival firms under oligopoly.
3. Conflicting Attitude of Firms:
Under oligopoly, two types of conflicting attitudes are found in the firms. On the one hand, firms realize the disadvantages of mutual competition and desire to combine to maximize their joint profits. This tendency leads to the formation of collusion. On the other hand, the desire to maximize one’s individual profit may lead to conflict and antagonism, the firms come into clash with one another on the question of distribution of profits and allocation of markets. Thus, there is an existence of two opposing attitudes among the firms.
4. Few firms. In this market, only few sellers are found:
For example, the market for automobiles in India exhibits oligopolistic structure as there are only few producers of automobiles. If there are only two firms, it is called ‘duopoly’.
5. Nature of product:
If the firms product homogeneous product, it becomes pure oligopoly. The firms with product differentiation constitute impure oligopoly.
6. Interdependence among firms:
In oligopoly market, each firm treats the other as its rival firm. It is for this reason that each firm while determining price of its product, takes into account the reaction of the other firms to its own action.
7. Large number of consumers:
In this market, there are large numbers of consumers to demand the product.
8. Indeterminate demand:
The demand curve under oligopoly is indeterminate because any step taken by his rivals may change the demand curve.