The Term “Oligopoly” has been derived

from two Greek words.

‘Oligi’ which means few and ‘Polien’
means sellers.

Thus Oligopoly is an abridged version of

monopolistic competition . It is a
competition among few big sellers each
one of them selling either homogenous
or hydrogenous products.
Feller defines Oligopoly as
“Competition among the
few”.

In an Oligopolistic market the

firms may be producing
either homogenous products
or may be having
differentiation in a given line
of production.
Oligopoly refers to a market situation where
there r a few sellers (2 to 10) in a market,
selling homogenous or differentiated
products. Oligopoly is often described as
‘Competition among few’.

When the products of a few sellers are

homogenous it is known as ‘Pure Oligopoly’
When the products of few sellers are
differentiated , but close substitutes of each
other it is known as “Differentiated
Oligopoly” .
1. Few Sellers : An oligopoly market is characterized by
a few sellers and their number is limited . (usually not
more than 10) Oligopoly is a special type of imperfect
market. It has a large number of buyers but a few
sellers.

2. Homogeneous or Differentiated Product : The

Oligopolists produce either homogenous or
differentiated products. Products may be
differentiated by way of design , trademark or service
3. Interdependence : The most important
feature of the Oligopoly is the
interdependence in decision making of the
few firms which comprise the industry.

The reactions of the rival firms may be

difficult to guess. Hence price is
indeterminate under Oligopoly.

4. High Cross Elasticities : The cross elasticity

of demand for the products of oligopoly
firms is very high. Hence there is always
the fear of retaliation by rivals.
Each firm is conscious about the possible
action and reaction of competitors while
making any change in price or output
5. Importance of Advertising and Selling costs :
A direct effect of interdependence of the Oligopolistic
firms is that they have to employ various aggressive and
defensive marketing weapons to gain greater share in the
market or to maintain their share.
Hence, the firms will have to incur a good deal of costs on
advertising and other measures or sales promotion .
Firms in Oligopoly market avoid price cutting and try to
compete on non-price basis. This is because if they start
under-cutting one another, a type of price war will
emerge which will drive a few of them out of the market
as the customers will try to buy from the seller who is
selling at the cheapest price.
6. Competition : Competition is unique in an
oligopoly market. It is a constant struggle
against rivals.

7. Different size : The size of firm in an

oligopoly market. It is a constant struggle
against rivals.

8. Group Behaviour : Each Oligopolist

closely watches the business behaviour of
other Oligopolists in the industry and
designs his moves on the basis of some
assumptions of their behaviour .
9. Uncertainty : The interdependence of
other firms for one’s own decision
creates an atmosphere of uncertainty
about price and output

10. Price Rigidity : In an oligopoly

market each firm sticks to its own price
to avoid a possible price war. The price
remains rigid because of constant fear of
retaliation from rivals.
Because of interdependence , an oligopolistic firm cannot
assume that its rival firms will keep their quantities
constant when it makes changes in price or quantity.
When an oligopolistic firm changes its prices, its rival
firms would retaliate and change their prices which in
turn would affect the demand of the former firm.

Oligopoly can be classified into several forms. Some of the

important forms of Oligopoly are as follows
1. Perfect and Imperfect
Oligopolies : If the product of the
rival firm are homogenous then it is
Perfect Oligopoly, if the product are
differentiated it is Imperfect Oligopoly.

2. Open and Closed Oligopolies :

If entry is open to new firms it is
termed as Open Oligopoly, and if entry
is strictly restricted it is termed as
Closed Oligopoly.
3. Collusive Oligopoly : If the firms
under oligopoly market combine together
instead of competing it is known as
Collusive Oligopoly. The collusive may take
place in the form of a common agreement or
an understanding between the firms.

4. Partial and Full Oligopoly : Partial

oligopoly is formed when the dominant firm
which is the price leader and all other firms
follow the price of the price leader. If no
firm acts as a price leader then it is called
Full Oligopoly.
Because of interdependence , an oligopolistic firm
cannot assume that its rival firms will keep their
quantities constant when it makes changes in price
or quantity. When an oligopolistic firm changes its
prices, its rival firms would retaliate and change
their prices which in turn would affect the demand
of the former firm.

Economists have established a number of price-output

models for Oligopoly market, depending upon the
behaviour pattern of the members of the group. A
few important ones are as follows :
1. Avoidance of Interdependence : Some
economists have assumed that oligopolist firms ignore
interdependence . When interdependence disappears
from decision making the demand curve facing the
oligopolist becomes determinate.

2. Price Leadership : Another approach is that the

firms in an Oligopoly would accept one firm as a leader
and would follow him in setting prices. Such a leader
firm may be dominant or low-cost firm producing a very
large proportion of the total production and having a
great influence over the market.
3. Price Wars : Some economists
assume that an oligopolist is able
to predict the counter moves of
his rivals, and they provide a
determinant solution to the price
and output problem.

4. Game Theory : In the theory of games,

the oligopolistic firms does not guess at it’s
rivals reaction pattern, but calculates the
optional moves by rival firms. It calculates
their best possible strategies and in view of
that adopts its policies and counter moves.
5. Non-price competition : Since the
oligopolists face the danger of retaliation
in price cut competition, they resort to
non-price competition. This can take the
from of advertising, sales promotion ,
improvement of the product etc.

6. Secret Price Concessions : Since an

open price cut is retaliated by rivals,
some oligopolists offer secret price
concessions for selected buyers.

From the above analysis it is clear that there

is no single determinant solution to the
price output fixation under Oligopoly. The
fixing of price under oligopoly market
situation is very difficult.
In many oligopolistic industries, prices
remain sticky or inflexible for a long time
even though the economic conditions
change. Many explanations have been
given for this price rigidity under
Oligopoly and the most population
explanation is the Kinked Demand Curve
Hypothesis given by an American
economist Paul Sweezy.
According to the kinked demand curve
hypothesis, the demand curve facing
the Oligopolist has a ‘Kink’ at the
level of the prevailing price. The kink
is formed at the prevailing price
level because the segment of the
demand curve above the prevailing
price level is highly elastic and the
segment of the demand curve below
the price level is inelastic.
The figure shows a kinked demand curve dD with a
kink at point k. the prevailing price is OP and the
firm produces and sells OQ output. The upper
segment dk of the demand curve dD is relatively
elastic and the lower segment kD is relatively
inelastic.

The differences in elasticity's is due to the particular

competitive reaction pattern assumed by kinked
demand curve hypothesis. The assumed pattern is
“Each Oligopolist believes that if he lowers the
price below the prevailing level, his competitors
will follow him and accordingly lower their prices,
whereas if he raises the price above the prevailing
level, his competitors will not follow his increase in
price”
Each oligopolist will find himself in
such a situation that on one hand,
he expects rivals to match his price
cuts very quickly and on the other
hand, he does not expect his rivals
to match his price increase .

Given this expected competitive

pattern, each oligopolist will have a
kinked demand curve dD, with the
upper segment dK being relatively
elastic and the lower segment kD
being relatively inelastic
1. The oligopoly model provides a theoretical
explanation as to why stable prices exist in oligopolistic
industries. But it takes prevailing prices as given and
provides no justification as to why that price level
rather than some other is the prevailing price
i.e. the kinked demand model can be viewed as incomplete.

2. Stigler had tested the kinked demand curve

empirically on several oligopolies. He found that
oligopolistic rivals are just as likely to follow price
increase as price decreases indicating little support for
the kinked demand curve.
3. The kinked demand Oligopoly theory
does not apply to oligopoly cases of price
leadership and price cartels.

4. In case of pure oligopoly, the kinked

demand curve does not provide adequate
explanation for price rigidity.

5. The explanation of price stability by

Sweezy’s kinked demand curve theory
applies to depression periods. In periods
of boom and inflation, when the demand
for the products increase, price is likely to
rise rather than remain stable.