Oligopolistic Competition

Oligopolistic Competition

Oligopolistic Competition: A market arrangement in which a few enterprises dominate is known as an oligopoly. A market is considered to be extremely concentrated when it is shared by just a few companies. Although a few large companies dominate the industry, numerous small businesses may also exist. When it comes to the air travel industry, big airlines such as British Airways (BA) and Air France frequently run their routes with just a few close rivals, but there are also numerous small airlines catering to vacationers or providing specialised services.

Oligopolistic Competition Characteristics

Now that you know what an oligopoly competition is, let’s look at the features of an oligopoly:

• Only a few businesses exist.

There are a few major enterprises in an oligopoly, but the precise number of firms is unknown. Furthermore, since each business generates a considerable share of the overall production, there is fierce rivalry

• Entry Obstacles

Because there exist hurdles to entry, such as patents, licencing, and ownership over critical raw resources, an oligopolistic corporation may make super-normal profits in the long term. These impediments obstruct the entrance of new businesses into the sector.

• Price Competition Without a Price

Firms strive to avoid price competition under Oligopoly because they are afraid of price wars, therefore they rely on non-price measures like advertising, after-sales services, warranties, and so on. Firms will be able to influence demand and establish brand awareness as a result of this.

• Interdependence

Because a few businesses control a major portion of the industry’s overall production, each company is influenced by competing firms’ pricing and output choices. As a result, in an oligopoly, there is a great deal of interdependence among enterprises. As a result, while deciding its pricing and production levels, a company considers the actions and reactions of its competitors.

• The Product’s Nature

The goods of oligopolistic enterprises are either homogenous or distinctive.

• Costs of Selling

Because companies aim to minimise price competition and because there is so much interconnectedness among them, selling expenses are crucial when fighting for a higher market share versus other firms.

• There is no one-of-a-kind price pattern.

Firms in an oligopoly aim to act independently to maximise profits on the one hand, and collaborate with competitors to reduce uncertainty on the other.

Situations in real life might change depending on their motivations, making it hard to forecast price patterns across organisations. Firms may compete or cooperate with one another, resulting in a variety of price circumstances.

• The Demand Curve’s Indeterminacy

Oligopoly, unlike other market systems, makes it impossible to predict a firm’s demand curve. This is because, on the one hand, rivals are highly interdependent. On the other side, there is apprehension about the response of the competitors. When a business adjusts its pricing, competitors might respond in a variety of ways, making the demand curve ambiguous.

• Oligopolistic competition behaviour

There are several conceivable outcomes in terms of a firm’s conduct under Oligopoly, depending on the businesses’ aims, the level of entry barriers, and the form of government regulation. These are the following:

• Price stability
• Price competition
• Price fixing by collusion

Additionally, an oligopoly might be collusive or non-collusive. A collusive oligopoly is a market arrangement in which businesses collaborate to determine pricing, production, or both. A non-collusive oligopoly is a market system in which enterprises compete instead of collaborating with one another.

Sweezy’s Kinked Demand Curve Model for Non-Collusive Oligopoly (Price-Rigidity)

There are usually a lot of pricing rigidities in oligopolistic marketplaces. Paul Sweezy utilised an unusual demand curve called the kinked demand curve to describe these rigidities in 1939.

The kink in the demand curve has a reason.

Firms are said to respond in two ways in response to a price adjustment by a competitor. Simply put, corporations follow price reductions by a competitor but not price hikes. As a result, if a seller raises the price of his goods, his competitors do not follow suit.

As a consequence of the price increase, the firm’s market share decreases dramatically. On the other hand, if a seller lowers the price of his goods, competitors will lower their prices to match the lower price of the company.

This assures that their market share does not dwindle. When competitors respond, the company that lowers the price first loses out on the price reduction.