Download Oligopoly characteristics

DUOPOLY AND OLIGOPOLY
Duopoly and Oligopoly market forms are forms of imperfect competition. When
there are two firms producing and selling a product in a market it is called
duopoly. Duo means two and poly is seller. For example two aerated soft drink
producers and sellers in India – Pepsi and Coca Cola. On the other hand when
there are few firms or sellers producing or selling a product oligopoly exists.
When there are two or more than two, but not more than ten sellers of a
product, oligopoly exists. Oligopoly is competition among the few. The simplest
form of oligopoly is duopoly.
Characteristics of duopoly and oligopoly
i)
Interdependence: Firms are interdependent on each other for decision-
making related to price, output, product design etc. An oligopolistic firm must
consider not only the market demand for industry but also the reactions of
other firms in industry to the actions or decisions taken by it.
ii)
Group behavior: Oligopoly firms are interdependent Theory of oligopoly
is a theory of group behavior. In oligopoly there are few firms in a group which
are interdependent for profit maximization.
iii)
Importance of Advertising and selling cost: A firm under oligopoly has
to incur advertising cost & costs on other promotion measures. This is also
known as selling cost. It
becomes necessary for the firm to incur this cost
because, advertising plays an important role in product differentiation .If any
firm fails to incur the required advertisement cost then customers will move
away to its rivals or competitors.
iv)
Indeterminateness
of
Firm’s
demand
curve:
Due
to
the
interdependence, a firm under oligopoly cannot assume that its rivals will not
react to any price change in its own price. Due to this uncertainty about price,
a firm loses the determinateness about its demand curve as it keeps on
shipping as rivals change their prices as a reaction to change in price by a firm.
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Types of Duopoly and Oligopoly
The duopoly and oligopoly can be broadly divided in two types
1. Collusive and
2. Non collusive
Collusive oligopoly exists when the firms in this market join hands or come
together for deciding the price and output to be sold. Collusive oligopoly means
a secret market structure where firms producing similar goods may behave like
a monopolist.
Non collusive oligopoly, on the other hand compete with each other for deciding
price and output in the same market. The question arises due to
indeterminateness of the demand curve of individual firm in this type of
market.
Following chart gives clear picture of various models of collusive and non
collusive oligopoly
Models of Oligopoly/Duopoly
Non Collusive Models
Collusive Models
1) Cartel
2) Price Leadership Model
a) Low Cost
b) Dominant
c) Expliotative
d) Barometric
1) Bertrand's Price War
Model
2) Cournot's Duopoly
Model
3) Edgeworth's Model
4) Kinked Demand curve
Model
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These models are explained in details in subsequent modules.
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