Oligopoly

An oligopoly is a market with small number of firms. A 'small' number is not precisely defined, but it may be as small as two players (a duopoly) or as many as eight to ten firms. Each firm has market power and there is interdependence among the firms. For instance,

Petrol is sold in India at outlets controlled by four public sector oil majors. IOC, roughly with 55 per cent market share, controls 7000 petrol pumps whereas BPCL and HPCL, with 20 per cent share, have 4300 outlets each. RPL and MRPL have been given access in this area. They have planned to set up close to 5000 petrol pumps².

Similarly, in the mobile phone sector Nokia (28%), Motorola (16%), Ericsson (12%) and Samsung (6%) are the major players. Panasonic, Alcatel and Siemens are neck to neck with roughly 5.5 per cent or 5.6 per cent³,

It may be noted that with globalisation and liberalisation, there has been competition in the market. Firms who virtually had monopoly now face competition with the entry of new firms. Oligopoly is found in steel, aluminium, airlines and automobiles.

Sources of oligopoly are same as that of monopoly.

Features of Oligopoly

1.       The industry is composed of a few firms who are major suppliers in the market which gives each firm market power.

2.       There is interdependence between the firms. Each firm considers its competitors reaction to its own decisions. The smaller the number of firms, the more the interdependence.

3.       Companies produce either homogeneous products (like cement, steel and aluminium) or differentiated products (cigarettes, airlines and automobiles).

4.       There are entry barriers for potential entrants in the market. Like in pharmaceutical companies, patent held by drug manufacture company may legally prevent entry of new firms.

5.       Non-price competition is common under this market form as retaliation is less against advertising, product improvement, R&D, and promotional techniques.

Different market structures can be distinguished by the degree of concentration. Effective monopoly exists when a single firm has 90 per cent or above market share. Tight oligopoly comprises concentration ratio above 60.

The higher the market concentration ratio, the greater the degree of dominance of small firms in the particular product market. The most distinctive feature of an oligopolistic industry is that sellers must recognise interdependence. The oligopolist has to consider the actions of rivals on his price policy.

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