This is called a Oligopsony and usually allows the buyers to exert a great deal of control over the sellers, often resulting in the depression of … prices. A situation in which a particular market is controlled by a small group of firms. On the other end, the theory of monopoly deals with a sole individual and it is also appropriate to assume profit-maximising behaviour on his part. Indeterminate Demand Curve: Under oligopoly, the exact behaviour pattern of a producer cannot be determined with certainty. This indicates that a huge percentage of the Oligopoly market is occupied by the leading commercial firms of a country. The price which is fixed under oligopoly without product differentiation is indeterminate.
In an oligopoly, there must be some barriers to entry to enable firms to gain a significant market share. But the situation under oligopoly is quite different because of interdependence of the firms in it. This is achieved when the price of the product is greater than the average variable cost. If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect oligopoly. One will reduce financing rates and the others will follow suit. Monopoly A monopoly refers to a market structure where a single firm controls the entire market. This leaves all of them with a significant amount of market power.
In this scenario, the firm has the highest level of market power, as consumers do not have any alternatives. But such expenditure is the life-blood of an oligopolistic firm. Therefore, firms compete using non- price competition methods. Furthermore, later the Hindustan Times started offering the newspaper at Rs. The decisions of one firm affect the profits of other firms. Even though some companies would infuse huge capital in performing the start-up of their venture, but the most important criterion is their brand image and reputation in the industry.
However, oligopoly is best defined by the conduct or behaviour of firms within a market. A change in output or price by one firm evokes reaction from other firms operating in the market. Though an oligopolistic market does not have any sources of power, it comes into existence solely due to the accommodating of other sellers. The advantage is that it allows for greater efficiency through stand … ardization, economies of scale for production and new product development , and avoidance of a monopoly. This process of action-reaction of the firms may continue in an unending phase of uncertainty. 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.
If the firms produce a differentiated product, like automobiles, the industry is called differentiated or imperfect oligopoly. We see examples of this with the major mortgage lenders and petrol retailers. 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. The economic structure where there are a handful of sellers in the market selling similar products and competing among themselves. This results in a price war.
In spite of there being other smaller firms in the market, the major ones account for more than half of the total industry output. A small number of firms dominate the industry. As a result, they would not allow the third party to enter into the market and perform sharing in their market share. A firm under oligopoly relies more on non-price competition. Oligopolies are characterized by a small number of suppliers but greater than one.
Interdependence among the rival oligopolists is the main cause of the indeterminateness of the demand curve under oligopoly. This is due to the advertising that makes the competition intense. Advertising spending runs in millions of pounds for many firms. Alternatively, oligopolies can see fierce competition because competitors can realize large gains and losses at each other's expense. Thus, advertisement can become a life and death matter for a firm under oligopoly. So, oligopoly lies in between monopolistic competition and monopoly. Collusion occurs when businesses agree to act as if they were in a monopoly position.
It also prepares businessmen to accept the outcomes arising from rivalries with respect to alterations in the production and prices of goods. If any firm does a lot of advertisement while the other remained silent, then he will observe that his customers are going to that firm who is continuously promoting its product. There is no generally accepted theory of group behaviour. The strategy of a firm is interdependent. There are few firms in a group which are very much interdependent. But, if they can stick to their quotas and keep the price at P2, they make supernormal profit. Under monopolistic competition, where there is a large number of firms producing products which are close substitutes for each other, changes in price by an individual firm will have a negligible effect on each of its many rivals.
It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on prices and output 3. Restrictions to entry Due to economic, institutional, legal or any other reason. It uses all resources at its disposal to counter the actions of rival firms to ensure its survival and growth in the market. For example, in a hypothetical health insurance market, out of the 20 firms doing business the top 4 firms are responsible for 65% of the total industry sales, while the figure shoots up to 80% if the top 10 firms are taken into consideration. The point of interdependence is also evident in respect to the performance of Schweppes and Wrigley because the major decisions as undertaken by a firm has an impact over the others. Barriers to entry, but less than monopoly. In such a case it acts in its sphere as a monopolist in lining price and output.