Price under oligopoly

14/03/2020 0 By indiafreenotes

The term oligopoly has been derived from two Greek words, ‘oligoi’ means few and ‘poly’ means control.

Therefore, oligopoly refers to a market form in which there is a control of few sellers on the market. These sellers deal either in homogenous or differentiated products.

Oligopoly is one of the forms of an imperfectly competitive market In India the aviation and telecommunication industries are the perfect examples of oligopoly market form. The aviation industry has only few airlines, such as Kingfisher, Air India, Spice Jet, and Indigo.

On the other hand, there are few telecommunication service providers, including Airtel, Vodafone, MTS, Dolphin, and Idea. These organizations are closely interdependent on each other This is because each organization formulates its own pricing policy by taking into account the pricing policies of other competitors existing in the market.

Characteristics of oligopoly:

(i) Few sellers and many buyers

(ii) Homogeneous or differentiated products

(iii) Barriers to entry and exit

(iv) Mutual interdependence among organizations

(v) Existence of price rigidity

(vi) Lack of uniformity in the size of organizations

Oligopoly Features

 The Oligopoly Market characterized by few sellers, selling the homogeneous or differentiated products. In other words, the Oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of the product.

Under the Oligopoly market, a firm either produces

  1. Homogeneous Product

The firms producing the homogeneous products are called as Pure or Perfect Oligopoly. It is found in the producers of industrial products such as aluminum, copper, steel, zinc, iron, etc.

  1. Heterogeneous Product

The firms producing the heterogeneous products are called as Imperfect or Differentiated Oligopoly. Such type of Oligopoly is found in the producers of consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc.

Features of Oligopoly Market

(i) Few Sellers

Under the Oligopoly market, the sellers are few, and the customers are many. Few firms dominating the market enjoys a considerable control over the price of the product.

(ii) Interdependence

It is one of the most important features of an Oligopoly market, wherein, the seller has to be cautious with respect to any action taken by the competing firms. Since there are few sellers in the market, if any firm makes the change in the price or promotional scheme, all other firms in the industry have to comply with it, to remain in the competition.

Thus, every firm remains alert to the actions of others and plan their counterattack beforehand, to escape the turmoil. Hence, there is a complete interdependence among the sellers with respect to their price-output policies.

(iii) Advertising

Under Oligopoly market, every firm advertises their products on a frequent basis, with the intention to reach more and more customers and increase their customer base. This is due to the advertising that makes the competition intense.

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. Thus, in order to be in the race, each firm spends lots of money on advertisement activities.

(iv) Competition

It is genuine that with a few players in the market, there will be an intense competition among the sellers. Any move taken by the firm will have a considerable impact on its rivals. Thus, every seller keeps an eye over its rival and be ready with the counterattack.

(v) Entry and Exit Barriers

The firms can easily exit the industry whenever it wants, but has to face certain barriers to entering into it. These barriers could be Government license, Patent, large firm’s economies of scale, high capital requirement, complex technology, etc. Also, sometimes the government regulations favor the existing large firms, thereby acting as a barrier for the new entrants.

(vi) Lack of Uniformity

There is a lack of uniformity among the firms in terms of their size, some are big, and some are small.

Since there are less number of firms, any action taken by one firm has a considerable effect on the other. Thus, every firm must keep a close eye on its counterpart and plan the promotional activities accordingly.

In oligopolistic market situation, a small number of organizations compete with each other. The sales of each organization under oligopoly depend on the price charged by it as well as the price charged by other organizations in the market. If an organization lowers down its prices, its sales would increase.

However, the sales of other organizations in the market would decrease. In such a scenario, other organizations would also lower down their prices. Therefore, the price and output are indeterminate under oligopoly. In other market structures, such as perfect competition and monopoly, price and output are determined by taking into account demand, supply, revenue, and cost factors.

In such type of market structures, the actions and reactions of other organizations related to any pricing-decision are ignored. According to Miller, “in a perfectly competitive model, each firm ignores the reaction of other firms because each firm can sell all that it wants at the going market price. In the pure monopoly model, the monopolist does not have to worry about the reaction of rivals since by definition they are none. However, there is interdependence of firms in the oligopoly. Hence, the decisions of a firm will affect the other firms, which in turn will react in way that affects the initial firm. This causes uncertainty. Thus, it is a difficult task to draw the demand curve of an oligopolist.”

The main reasons for indeterminate price and output under oligopoly are as follows:

  1. Different Behavior Patterns

Imply that under oligopoly, the behavior patterns differ from organization to organization For example, under oligopoly, organizations may cooperate with each other in setting the pricing policy or they may act as competitors.

According to Baumol, “under the circumstances a very wide variety of behavior patterns becomes possible. Rivals may decide to get together and co-operate in the pursuit of their objectives so far as the law allows, or at the other extreme they may try to fight each other to the death.” Thus, under oligopoly, the price and output of organizations differ in different behavior patterns.

  1. Indeterminate Demand Curve

Implies that the demand curve is unknown under oligopoly due to different behavior patterns of organizations. Under oligopoly, every organization keeps an eye on the actions of rivals and makes strategies accordingly.

Therefore, the demand curve under oligopoly is never stable and shifts in response to the actions of rivals. According to Baumol, “the firm’s attempts to outguess one another are then likely to lead to interplay of anticipated strategies and counter strategies which is tangled beyond hope of direct analysis.”

  1. Non-profit Motive

Implies that under oligopoly, organizations are not only indulged in maximizing profit, but also compete with each other for non-profit motive. For example, organizations use advertising and other tools to promote their sales. These motives lead to indeterminate price and output under oligopoly.