Main Characteristics of Oligopoly

Question

Task:

1. What are the main characteristics of an oligopoly? Give real world examples.
2. Why could the market for Automobile be said to be oligopolistic?
3. Why do you think that firms choose not to compete on price?
4. What are the main barriers to entry in the Automobile market?

Answer:

Introduction
One of the most important forms of imperfect competition is Oligopoly. The term is a combination of two Greek words, i.e., Oligi, which means few and Polein, means to sell. This form of marketing occurs when there are few sellers (more than two) in the market and selling same types of products. It rests between monopolistic competition and monopoly (Askar, El-Wakeel & Alrodaini, 2018).

It is also referred as the competition among the few. Under this market condition, one seller can influence the price-output policy of the product. The reason behind this is that there are few numbers of sellers or producers, and each firm controls a huge portion of the total supply. When products of the few sellers are differentiated, but the sellers are close substitutes for each other, then oligopoly will dominate in that situation.

Some example of Oligopoly:
Markets for smartphones, automobiles, and electronics are few examples of oligopoly market. In all these market, there are only a few sellers for a particular product. One of the special characteristics of oligopoly is DUOPOLY. It is a state of market dominance by two companies. Two firms sell a homogenous product, and you will not get any substitute for those products.

Airbus and Boeing control are some of the examples where two companies control a big portion of a market. There comes some soft drink market which is controlled by Coca-Cola and Pepsi. Then there are some examples of commercial aircraft market.

Oligopoly market types:
Based on the characteristics of oligopoly, it can be divided into following types:

Perfect oligopoly:
It will be said to be a perfect oligopoly condition when two company offer homogenous products (Vives 2001). Well, such condition is very rare, but steel, aluminum, and chemical producing company can be treated as pure oligopoly industries (Onofri & Boatto, 2015).

Differentiated oligopoly:
It happens when the firms produce different products but are the close substitute for each other. The industries that can come under this condition are cigarettes manufacturing company, soft drinks production industries, and car manufacturing industry. Every company’s product will have their characteristics.

Conniving and non-conniving oligopoly:

It is also known as the cooperative oligopoly. Here the firms together decide the price of the product. On the other side when there is a stiff competition among the firms, that situation called the non-conniving oligopoly.

Characteristics of Oligopoly:
The Oligopoly characteristics are very special, and those are not there in market structure. However, followings are some main characteristics of the oligopoly.

1. Interdependence:
   Interdependent means, if one firm changes its business or production behavior then that will affect the other firm’s activity. While developing any pricing strategy or determining production output level, the firm will study the action of the competitor firm. If a firm changes its output level or price of the product, it will influence the other firm operating in the same market. For example, if Honda changes its vehicle then; other automobile company will do some changes in their vehicle to stay in the market(Mazzeo 2002).


2. Advertising and selling costs:
   Under oligopoly, the firms will have to choose different defensive and effective marketing tools to capture a large portion of market share. They will spend more amounts on advertising and in other promotional tools (Rao, 2015). Looking at the uses of advertising in oligopoly, professor Baumol stated that oligopoly is the only condition where advertisement comes into its own, and one can understand the true power of advertising.


3. No-price competing in the market:
   In the oligopoly, the firms can easily control or motivate the prices. But, under this, they always try to avoid this type of situation as they know that can lead to a price war(Bauer 2013). That why they always go with the price rigidity policy. Under the Price rigidity policy, changes in demand and supply will not affect the price of the product and will remain constant. If one firm rises the price, maybe the other firms will not do that as they know they can face loss. That’s why they prefer to do business with non-price competition(Vives 2001).


4. Block firms to enter the market:
   Under oligopoly, there are few firms, and the reason behind this is oligopoly prevent companies from entering the market. They need huge capital investment, fine raw materials, patents and more to survive in this. Some of the reasons that create obstacle are:
   • A few big-scale industries rule the market and enjoy the economic condition.
   • Having a strong power over essential raw materials and inputs.
   • A new firm will need high capital to promote the business.
   • A firm will need exclusive patent or copyright to run under oligopoly.
   That why oligopolistic firms can earn supernormal profits.


5. Group behavior:
   One of the important oligopoly characteristics is group behavior. In this situation, the firms will behave like they are a single firm even though individually they have their independence. The reason behind this is, oligopoly leads to interdependence among firms. While deciding product pricing and output level, one firm will consider the changes made by the other firms. However, oligopoly companies consider group discussion, instead of developing pricing strategy on their own. Group discussion combines the interest of all the firms to develop the price and output level.


6. Types of the products:
   These characteristics of oligopoly have divided this into two parts. Under oligopoly, firms can develop similar kind of products or different products than its competitors(Mazzeo 2002). When a firm produces homogeneous products, that is called as perfect oligopoly condition, and when there are different products, that situation is called as an imperfect oligopoly.


7. Uncertain demand curve:
   Under oligopoly, it is quite difficult to evaluate the behavioral pattern of the producer. That's why the demand curve of a firm is indeterminate. One slight change in rival pattern can affect another firms’ demand curve. Here all the firms are interdependent and can’t ignore a tiny reaction of the competitor firms. So, this oligopoly characteristics show that under oligopoly, demand curve always shifts and it is uncertain(Bauer 2013).

Automobile market as Oligopoly
After looking at the characteristics of oligopoly, where there are few companies in the market which offer homogenous products and dominating the majority of the market share, that situation is called as an oligopoly. The automobile market can be treated as the oligopoly market condition.

The automobile market justifies one important oligopoly characteristics, i.e., few automobile manufacturers are there who is now controlling the market. If compared with current automobile market scenario, it will be quite difficult for a new company to enter this market. Well-known automobile industries, like Ford, BMW, Volvo, and Mercedes-Benz have been achieved good economic scale across the world.

Barriers to entering the automobile market

During the case study, it is found that as oligopoly market condition is there in the automobile market, it will be quite difficult to enter for a new car manufacturer who can compete with the brand like BMD and Mercedes-Benz. One of the characteristics of oligopoly states that a new company will need a huge amount of capital, raw materials, and exclusive patents to start its business under oligopoly market environment(Vives 2001).

A new company will able to survive in the market if the company provides that quality of vehicles like Mercedes-Benz. For this, they need strong capital. This factor can diversely affect them. Apart from that, the former companies will not let the new companies enter the market easily. Another major factor is the reputation and image of the new company.

For a reputable and well-known company, it will not difficult to enter the oligopoly market because they carry that much of brand reputation(Mazzeo 2002). But, for a new market, they may not have the brand reputation. So, the above-detailed discussion has given a clear idea on the characteristics of oligopoly and how oligopoly market can affect the new industry.

References
Askar, S.S., El-Wakeel, M.F. and Alrodaini, M.A., 2018.Exploration of Complex Dynamics for Cournot Oligopoly Game with Differentiated Products.Complexity, 2018.

Bauer, P.T., 2013. West African trade: A study of competition, oligopoly and monopoly in a changing economy. Cambridge University Press.
Mazzeo, M.J., 2002. Product choice and oligopoly market structure. RAND Journal of Economics, pp.221-242.
Onofri, L. and Boatto, V., 2015.Cournot Oligopoly, Homogeneous Products and Grappa Market: An Econometric Study (No. 01/2015). EERI Research Paper Series.

Rao, T.R., 2015. Strategic Behavior of Firms in Differentiated Oligopoly.International Journal of Applied Behavioral Economics (IJABE), 4(3), pp.51-62.

Vives, X., 2001. Oligopoly pricing: old ideas and new tools. MIT press.