Oligopoly Market Conditions

Keywords: oligopoly introduction

Oligopoly is such a market situation wherein the number of sellers is few and the numbers of buyer are many. That is unlike the monopolistic competition the seller are not one but at least two and could range up to ten. This is because of the following reasons.

Heavy input costs of producing the product making it difficult for every firm to make investments.

Entry barriers made by the bigger firms in the form of government regulations, price competition, brand setting and other pressure tactics.

The method of production requires specialization which is not available with other firms.

Product enjoys monopoly in the market.

Thus the above mentioned few reasons can become the cause of set up of an oligopoly market.

Number of sellers and buyers in oligopoly:

Now Oligopoly, as mentioned above can have from two to tens suppliers, rather than one in the case of monopoly market. Thus they together become the price setters instead of price takers. Any rise in price will benefit the rise in sales of other company products that may be similar or differentiated. Reason being the other companies won’t follow in rising their product prices as they would be expecting an increase in sales.

On the other side, any fall in price will not help gain many customers, as the other companies will respond in a similar pattern and the result will be price war. Thus declining the price level would not help gain as many customers as expected.

Price Equilibrium in Oligopoly:

An equilibrium condition is when the prices remain unstable and the supply remains same. To increase the demand of the products and meet the competition of other products in the market, these firms indulge in heavy advertising campaigns. Through advertisements they teach the customers about the new feature that is added in their product and various other benefits of using their product. This sometimes results in putting stains on the other company’s product in indirect words.

Examples of Oligopoly:

A number of examples of Oligopoly market situation can be figured out around us. These are explained as follows.

PepsiCo and Coca Cola Co. are the two market leader and sellers of soft drinks around the world. Thus two numbers of firms selling to large number of buyers makes it an Oligopoly market. Furthermore these companies are always making heavy investments on advertisements around the globe. Some of the advertisements may be meant to harm the brand image of other. The result in another advertisement in response. Sometimes these matters are even taken to courts for settlement.

Boeing and Airbus are another two large companies that makes planes to foster the need of various countries. Again these are two companies, which are the sign of Oligopoly market conditions. These companies although do not make much advertisements, but offers latest techniques at competitive prices by making product differentiation and attracting customers around the globe.

OPEC includes a few numbers of sellers of petroleum product throughout the world. As the number of seller is not two but not many either. The numbers of buyers are large, including countries in Asia, Africa, Europe etc.

Diagrammatic representation of Oligopoly:

As we know that in the Oligopoly is a market where in the number of seller are more than two but not higher in number, whereas the buyers are many. Moreover the price rise results in benefitting the other company’s product sales. And on the other hand the price fall results in attracting only a few customers. This type of market conditions can be displayed as follows.

Diagram showing how much profit a cartel earns when they all cooperate, when 1 firm cheats, and when none of the firms cooperate.

Source:

http://thismatter.com/economics/oligopoly-game-theory.htm

From the above diagram it’s clear that this diagram is very similar to monopoly market situation. But the difference is this type of condition remains for a definite price period. That is if any firm try to raise its prices from Pc to Po the result would be benefit to other firms. Whereas if a firm try to reduce its product prices than that would not foster him more customers than expected. The result would be affecting the profit margins.

Thus a Cooperative Oligopoly price level is administered where in all the companies agree to follow a minimum price levels to earn good profits. Any displacement from the agreed price would affect the changer or so called the Cheater, either by fall in demand or fall in profits. Thus a Nash Equilibrium point can be accepted by all the companies in the Oligopoly where in all the companies earn good profits at the present output and price levels.

Features of Oligopoly:

Now we can conclude the features of the Oligopoly market conditions. These are as follows.

Few producers or sellers and high numbers of buyers.

Product differentiation is up to some level or no product differentiation.

The firms enjoy normal profits in normal market conditions.

The firms depend on advertisements, quality rivalry and generally accepted by the group of firms.

Economies of scale will exist, as heavy investment and improved technology is needed to get similar quality output at the competitive costs.

New firms cannot enter the market, as the old firms create a barrier through government restrictions, heavy investments, pressure techniques like takeover of the uprising company.

Swift action is taken on the change in price level and defaming advertising campaign by according price change and responsive advertisements.

Conclusion:

In the nutshell we can say that the Oligopoly market situation is very similar to Monopoly market situation but with more than one number of seller up to limit extent. The pricing is done by proper agreement between the firms. The product differentiation may or may not present. The firms spend heavy on the advertising campaign and keep a close look at the advertising of other companies and response accordingly. The firms earn normal profits but input barriers on the new entrants.