10 CHARACTERISTICS OF OLIGOPOLY

An oligopoly is a market structure in which few firms dominate the market output.

Below are ten characteristics of Oligopoly:

Characteristics #1: An oligopolist sells goods that are either homogeneous or differentiated.

Goods sold in an oligopoly are either homogenous or slightly differentiated.

A pure oligopoly sells homogenous goods while a differentiated oligopoly sells differentiated goods.

Characteristics #2: Oligopolists maximize profit where marginal revenue equals marginal cost

Just like other market structures, an oligopolist maximizes profit where marginal revenue equals marginal cost.

If you are not yet familiar with profit maximization, refer to this post.

Characteristics #3: Oligopolists are highly interdependent

The pricing and output decisions made by each oligopoly are mutually dependent on the decisions of other firms in the market.

For example, if an oligopolist cut prices, other firms will follow suit to avoid losing market shares.

Characteristics #4: Oligopolists have market power

Oligopolists are price makers (or searchers) because they possess market power to raise prices above what is attainable in a competitive market.

However, the market power possessed by each oligopolist is highly dependent on the actions of other oligopolist.

For example, despite having a market power, an oligopoly may sometimes reduce price to at least gain some market shares

RELATED POST: 10 CHARACTERISTICS OF A MONOPOLISTIC COMPETITION

Characteristics #5: High barriers to entry exist in the market

High barriers to entry exist in an oligopoly because of economies of scale and legal barriers.

By the way, barriers to entry are technological and legal obstacles that prevent a firm from entering a market.

Characteristics #6: Indeterminate demand

The demand faced by an oligopolist is indeterminate as the reaction of other firms to a price change in an Oligopoly cannot be determined exactly predicted.

Some theories predict a kinked demand curve, but it is unlikely that all oligopoly will have a kinked demand curve

Characteristics #7: Oligopolists can collude

It is very much possible that oligopolists decide to collude, rather than compete.

One way in which oligopolists can collude is by forming a cartel. A cartel is a formal agreement among firms in an oligopolistic market.

Members of a cartel can agree on the price, market output and market shares of each member.

However, cartels are difficult to form because cartel agreements are illegal in most countries.

Because it is illegal to form a cartel, some oligopolies engage in tacit collusion.

Tacit collusion is an informal agreement between competitors in an oligopolist market, which does not explicitly involve the exchange of information.

Characteristics #8: There are many theories of Oligopoly

Oligopoly is arguably the most realistic market structure.

Surprisingly, there is no specific model for describing oligopolistic behaviour

Instead, there are many theories of oligopoly. Among the best-known theories of oligopolies are Cartel theory and kinked demand

Both have been extensively discussed here.

Characteristics #9: Oligopolists are not allocatively efficient.

Allocative efficiency means producing the goods most preferred by the consumer such that price equals marginal cost.

Oligopolists are allocatively inefficient because they do not produce at the output level where price matches marginal cost in the long run.

RELATED POST: 10 CHARACTERISTICS OF MONOPOLY

Characteristics #10: Oligopolies are not productively inefficient

Oligopolies are not productively efficient because they do not produce at the level where long-run average cost equals marginal cost.

These are the ten characteristics of oligopoly. In case you forgot, a oligopoly has the following characteristics: firms sells differentiated or identical goods, oligopolies are productively inefficient as well as allocatively inefficient, oligopolies have market power and the individual demand curve of each oligopolist is indeterminate.

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