Oligopoly as a market structure is distinctly different from other market forms.
Its main characteristics are discussed as follows:
The foremost characteristic of oligopoly is interdependence of the various firms in the decision making.
This fact is recognized by all the firms in an oligopolistic industry. If a small number of sizeable firms constitute an industry and one of these firms starts advertising campaign on a big scale or designs a new model of the product which immediately captures the market, it will surely provoke countermoves on the part of rival firms in the industry.
Thus different firms are closely inter dependent on each other.
Under oligopoly a major policy change on the part of a firm is likely to have immediate effects on other firms in the industry. Therefore, the rival firms remain all the time vigilant about the moves of the firm which takes initiative and makes policy changes. Thus, advertising is a powerful instrument in the hands of an oligopolist. A firm under oligopoly can start an aggressive advertising campaign with the intention of capturing a large part of the market. Other firms in the industry will obviously resist its defensive advertising.
Under perfect competition advertising is unnecessary while a monopolist may find some advertising to be profitable when his product is new or when there exist a large number of potential consumers who have never tried his product earlier. But according to Prof. Baumol, “under oligopoly, advertising can become a life-and-death matter where a firm which fails to keep up with the advertising budget of its competitors may find its customers drifting off to rival products.”
3. Group Behaviour:
In oligopoly, the most relevant aspect is the behaviour of the group. There can be two firms in the group, or three or five or even fifteen, but not a few hundred. Whatever the number, it is quite small so that each firm knows that its actions will have some effect on other firms in the group. In contrast, under perfect competition there are a large number of firms each attempting to maximise its profits.
Similar is the situation under monopolistic competition. Under monopoly, there is just one profit maximising firm. Whether one considers monopoly or a competitive market, the behaviour of a firm is generally predictable.
In oligopoly, however, this is not possible due to various reasons:
(i) The firms constituting the group may not have a common goal
(ii) The group may or may not have a formal or informal organization with accepted rules of conduct
(iii) The group may be dominated by a leader but other firms in the group may not follow him in a uniform manner.
This leads to another feature of the oligopolistic market, the presence of competition. Since under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals. So each seller is always on the alert and keeps a close watch over the moves of its rivals in order to have a counter-move. This is true competition, “True competition consists of the life of constant struggle, rival against rival, whom one can only find under oligopoly.”
5. Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. However, in the long-run, there are some types of barriers to entry which tend to restrain new firms from entering the industry.
These may be:
(a) Economics of scale enjoyed by a few large firms;
(b) Control over essential and specialized inputs;
(c) High capital requirements due to plant costs, advertising costs, etc.
(d) Exclusive patents; and licenses; and
(e) The existence of unused capacity which makes the industry unattractive.
When entry is restricted or blocked by such natural and artificial barriers the oligopolistic industry can earn long-run supernormal profits.
6. Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms differ considerably in size. Some may be small, others very large. Such a situation is asymmetrical. This is very common in the American economy. A symmetrical situation with firms of a uniform size is rare.
7. Existence of Price Rigidity:
In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its price, the rival firms will retaliate by a higher reduction in their prices. This will lead to a situation of price war which benefits none. On the other hand, if any firm increases its price with a view to increase its profits; the other rival firms will not follow the same. Hence, no firm would like to reduce the price or to increase the price. The price rigidity will take place.
8. No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two conflicting motives. Each wants to remain independent and to get the maxmium possible profit. Towards this end, they act and react on the price-output movements of one another which are a continuous element of uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes to cooperate with his rivals to reduce or eliminate the element of uncertainty. All rivals enter into tacit or formal agreement with regard to price-output changes.
It leads to a sort of monopoly within oligopoly. They may even recognize one seller as a leader at whose initiative all the other sellers raise or lower the price. In this case, the individual seller’s demand curve is a part of the industry demand curve, having the elasticity of the latter. Given these conflicting attitudes, it is not possible to predict any unique pattern of pricing behaviour in oligopoly markets.
9. Indeterminateness of Demand Curve:
In market structures other than oligopolistic, demand curve faced by a firm is determinate. The interdependence of the oligopolists, however, makes it impossible to draw a demand curve for such sellers except for the situations where the form of interdependence is well defined. In real business operations, the demand curve remains indeterminate. Under oligopoly a firm can expect at least three different reactions of the other sellers when it lowers its prices.
This happened due to the reason:
(i) It is possible that other maintain the prices they had before. In this case, an oligopolist can hope that its demand would increase substantially as the prices are lowered,
(ii) When an oligopolist reduces his price, the other sellers also lower their prices by an equivalent amount. In this situation although demand of the oligopolist making the first move will increase as he lowers his price, the increase itself would be much smaller than in the first case.
(iii) When a firm reduces its price, the other sellers reduce their prices far more. Under the circumstances the demand for the product of the oligopolistic firm which makes the first move may decrease. Thus uncertainty under oligopoly is inevitable, and as a result, the demand curve faced by each firm belonging to the group is necessarily indeterminate.