Ordinarily, the term market refers to a particular place where goods are

purchased and sold. But, in economics, market is used in a wide perspective.

In economics, the term market does not mean a particular place but the
whole area where the buyers and sellers of a product are spread.
In the words of A.A. Cournot, Economists understand by the term market,
not any particular place in which things are bought and sold but the whole of
any region in which buyers and sellers are in such free intercourse with one
another that the price of the same goods tends to equality, easily and quickly.

Market Structure:

Meaning:
Market structure refers to the nature and degree of competition in the market
for goods and services. The structures of market both for goods market and
service (factor) market are determined by the nature of competition prevailing
in a particular market.

Determinants:
There are a number of determinants of market structure for a particular good.
They are:
(1) The number and nature of sellers.
(2) The number and nature of buyers.
(3) The nature of the product.
(4) The conditions of entry into and exit from the market.

(5) Economies of scale.

Forms of Market Structure:

On the basis of competition, a market can be classified in the following

ways:
1. Perfect Competition:Perfect competition is a market structure in which all firms in an industry are
price- takers and in which there is freedom of entry into, and exit from,
industry.
2. Monopoly:Monopoly is the form of market organisation in which there is a single firm
selling a commodity for which there are no close substitutes.
3. Oligopoly:Oligopoly is a market situation in which there are a few firms selling
homogeneous or differentiated products. It is difficult to pinpoint the number of
firms in competition among the few.
4. Monopolistic Competition:Thus monopolistic competition refers to competition among a large number of
sellers producing close but not perfect substitutes for each other.

Defining and measuring oligopoly

An oligopoly is a market structure in which a few firms dominate. When a
market is shared between a few firms, it is said to be highly concentrated.

Although only a few firms dominate, it is possible that many small firms may
also operate in the market. For example, major airlines like British
Airways (BA) and Air France operate their routes with only a few close
competitors, but there are also many small airlines catering for the
holidaymaker or offering specialist services.

Concentration ratios
Oligopolies may be identified using concentration ratios, which measure the
proportion of total market share controlled by a given number of firms. When
there is a high concentration ratio in an industry, economists tend to identify
the industry as an oligopoly.

Example of a hypothetical concentration ratio

The following are the annual sales, in m, of the six firms in a hypothetical
market:
A = 56
B = 43
C = 22
D = 12
E=3
F=1
In this hypothetical case, the 3-firm concentration ratio is 88.3%, that is
121/137 x 100.

Examples
Fixed Broadband services

Fixed broadband supply in the UK is dominated by four main suppliers - BT

(with a market share of 32%), Virgin Media (at 20%), Sky (at 22%) and
TalkTalk (at 14%), making a four-firm concentration ratio of
86% (2015). Source: OFCOM.

Fuel retailing
Fuel retailing in the UK is dominated by six major suppliers, including Tesco,
BP, Shell, Esso, Morrisons and Sainsbury, as shown below:
Tesco: 19.26%BP: 19.13%Shell: 15.92%Esso: 13.61%Morrisons: 11.55%Sainsbury: 11.17%Total: 9.37%UK petrol retailing
market shares2012; Source: www.catalyst.comwww.economicsonline.co.uk
Tesco15BP14.9Shell12.4Esso10.6Morrisons9Sainsbury8.7Total7.3

Further examples
Cinema attendances
Banking

The Herfindahl Hirschman Index (H-H Index)

This is an alternative method of measuring concentration and for tracking
changes in the level of concentration following mergers. The H-H index is
found by adding together the squared values of the % market shares of all the
firms in the market. For example, if three firms exist in the market the formula
is X2 + Y2 + Z2; where X, Y and Z are the percentages of the three firms
market shares.
If the index is below 1000, the market is not considered concentrated, while
an index above 2000 indicates a highly concentrated market or industry the
higher the figure the greater the concentration.
Mergers between oligopolists increase concentration and monopoly power
and are likely to be the subject of regulation.

Key characteristics

The main characteristics of firms operating in a market with few close rivals
include:

Interdependence
Firms that are interdependent cannot act independently of each other. A firm
operating in a market with just a few competitors must take the potential
reaction of its closest rivals into account when making its own decisions. For
example, if a petrol retailer like Texaco wishes to increase its market share by
reducing price, it must take into account the possibility that close rivals, such
as Shell and BP, may reduce their price in retaliation. An understanding
ofgame theory and the Prisoners Dilemma helps appreciate the concept of
interdependence.

Strategy
Strategy is extremely important to firms that are interdependent. Because
firms cannot act independently, they must anticipate the likely response of a
rival to any given change in their price, or their non-price activity. In other
words, they need to plan, and work out a range of possible options based on
how they think rivals might react.
Oligopolists have to make critical strategic decisions, such as:

Whether to compete with rivals, or collude with them.

Whether to raise or lower price, or keep price constant.

Whether to be the first firm to implement a new strategy, or whether to

wait and see what rivals do. The advantages of going first or going second
are respectively called 1st and 2nd-mover advantage. Sometimes it pays to
go first because a firm can generate head-start profits. 2nd mover advantage
occurs when it pays to wait and see what new strategies are launched by
rivals, and then try to improve on them or find ways to undermine them.

Barriers to entry

Oligopolies and monopolies frequently maintain their position of dominance in

a market might because it is too costly or difficult for potential rivals to enter
the market. These hurdles are calledbarriers to entry and the incumbent can
erect them deliberately, or they can exploit natural barriers that exist.

Natural entry barriers include:

Economies of large scale production.
If a market has significant economies of scale that have already been
exploited by the incumbents, new entrants are deterred.

Ownership or control of a key scarce resource

Owning scarce resources that other firms would like to use creates a
considerable barrier to entry, such as an airline controlling access to an
airport.

High set-up costs

High set-up costs deter initial market entry, because they increase break-even
output, and delay the possibility of making profits. Many of these costs
are sunk costs, which are costs that cannot be recovered when a firm leaves
a market, and include marketing and advertising costs and other fixed costs.

High R&D costs

Spending money on Research and Development (R & D) is often a signal to
potential entrants that the firm has large financial reserves. In order to
compete, new entrants will have to match, or exceed, this level of spending in
order to compete in the future. This deters entry, and is widely found in
oligopolistic markets such as pharmaceuticals and the chemical industry.

Artificial barriers include:

Predatory pricing

Predatory pricing occurs when a firm deliberately tries to push prices low
enough to force rivals out of the market.

Limit pricing
Limit pricing means the incumbent firm sets a low price, and a high output, so
that entrants cannot make a profit at that price. This is best achieved by
selling at a price just below the average total costs (ATC) of potential
entrants. This signals to potential entrants that profits are impossible to make.

Superior knowledge
An incumbent may, over time, have built up a superior level of knowledge of
the market, its customers, and its production costs. This superior knowledge
can deter entrants into the market.

Predatory acquisition
Predatory acquisition involves taking-over a potential rival by purchasing
sufficient shares to gain a controlling interest, or by a complete buy-out. As
with other deliberate barriers, regulators, like the Competition and Markets
Authority (CMA), may prevent this because it is likely to reduce competition.

Advertising
Advertising is another sunk cost - the more that is spent by incumbent firms
the greater the deterrent to new entrants.

A strong brand
A strong brand creates loyalty, locks in existing customers, and deters entry.

Loyalty schemes
Schemes such as Tescos Club Card, help oligopolists retain customer loyalty
and deter entrants who need to gain market share.

Exclusive contracts, patents and licences

These make entry difficult as they favour existing firms who have won the
contracts or own the licenses. For example, contracts between suppliers and
retailers can exclude other retailers from entering the market.

Vertical integration
Vertical integration can tie up the supply chain and make life tough for
potential entrants, such as an electronics manufacturer likeSony having its
own retail outlets (Sony Centres), and a brewer likeHeineken owning its own
chain of UK pubs, which it acquired from the brewers Scottish and Newcastle
in 2008.

Collusive oligopolies
Another key feature of oligopolistic markets is that firms may attempt to
collude, rather than compete. If colluding, participants act like
a monopoly and can enjoy the benefits of higher profits over the long term.

Types of collusion
Overt
Overt collusion occurs when there is no attempt to hide agreements, such as
the when firms form trade associations like the Association of Petrol Retailers.

Covert
Covert collusion occurs when firms try to hide the results of their collusion,
usually to avoid detection by regulators, such as when fixing prices.

Tacit
Tacit collusion arises when firms act together, called acting in concert, but
where there is no formal or even informal agreement. For example, it may be
accepted that a particular firm is the price leader in an industry, and other
firms simply follow the lead of this firm. All firms may understand this, but no
agreement or record exists to prove it. If firms do collude, and their behaviour

can be proven to result in reduced competition, they are likely to be subject to

regulation. In many cases, tacit collusion is difficult or impossible to prove,
though regulators are becoming increasingly sophisticated in developing new
methods of detection.

Competitive oligopolies
When competing, oligopolists prefer non-price competition in order to avoid
price wars. A price reduction may achieve strategic benefits, such as gaining
market share, or deterring entry, but the danger is that rivals will simply reduce
their prices in response.
This leads to little or no gain, but can lead to falling revenues and profits.
Hence, a far more beneficial strategy may be to undertake non-price
competition.

Pricing strategies of oligopolies

Oligopolies may pursue the following pricing strategies:
1. Oligopolists may use predatory pricing to force rivals out of the market.
This means keeping price artificially low, and often below the full cost of
production.
2. They may also operate a limit-pricing strategy to deter entrants, which is
also called entry forestalling price.
3. Oligopolists may collude with rivals and raise price together, but this
may attract new entrants.
4. Cost-plus pricing is a straightforward pricing method, where a firm sets
a price by calculating average production costs and then adding a
fixed mark-up to achieve a desired profit level. Cost-plus pricing is also
called rule of thumb pricing.
There are different versions of cost-pus pricing, including full cost
pricing, where all costs - that is, fixed and variable costs - are

calculated, plus a mark up for profits, and contribution pricing, where

only variable costs are calculated with precision and the mark-up is a
contribution to both fixed costs and profits.

Cost-plus pricing is very useful for firms that produce a number of

different products, or where uncertainty exists. It has been suggested
that cost-plus pricing is common because a precise calculation of
marginal cost and marginal revenue is difficult for many oligopolists.
Hence, it can be regarded as a response to information failure. Costplus pricing is also common in oligopoly markets because it is likely that
the few firms that dominate may often share similar costs, as in the case
of petrol retailers.
However, there is a risk with such a rigid pricing strategy as rivals could
adopt a more flexible discounting strategy to gain market share.
Cost-plus pricing can also be explained through the application of game
theory. If one firm uses cost-plus pricing - perhaps the dominant firm
with the greatest market share - others may follow-suit so that the
strategy becomes a shared one, which acts as a pricing rule. This takes

some of the risk out of pricing decisions, given that all firms will abide by
the rule. This could be considered a form of tacit collusion.

Non-price strategies
Non-price competition is the favoured strategy for oligopolists because price
competition can lead to destructive price wars examples include:
1. Trying to improve quality and after sales servicing, such as offering
extended guarantees.
2. Spending on advertising, sponsorship and product placement - also
called hidden advertising is very significant to many oligopolists. The
UK's football Premiership has long been sponsored by firms in
oligopolies, including Barclays Bankand Carling.
3. Sales promotion, such as buy-one-get-one-free (BOGOF), is associated
with the large supermarkets, which is a highly oligopolistic market,
dominated by three or four large chains.
4. Loyalty schemes, which are common in the supermarket sector, such
as Sainsburys Nectar Card and Tescos Club Card.
Each strategy can be evaluated in terms of:
1. How successful is it likely to be?
2. Will rivals be able to copy the strategy?
3. Will the firms get a 1st - mover advantage?
4. How expensive is it to introduce the strategy? If the cost of
implementation is greater than the pay-off, clearly it will be rejected.
5. How long will it take to work? A strategy that takes five years to
generate a pay-off may be rejected in favour of a strategy with a quicker
pay-off.

Price stickiness
The theory of oligopoly suggests that, once a price has been determined,
will stick it at this price. This is largely because firms cannot pursue
independent strategies. For example, if an airline raises the price of its tickets
from London to New York, rivals will not follow suit and the airline will lose
revenue - the demand curve for the price increase is relatively elastic. Rivals
have no need to follow suit because it is to their competitive advantage to
keep their prices as they are.
However, if the airline lowers its price, rivals would be forced to follow suit and
drop their prices in response. Again, the airline will lose sales revenue and
market share. The demand curve is relatively inelastic in this context.

Kinked demand curve

The reaction of rivals to a price change depends on whether price is raised or
lowered. The elasticity of demand, and hence the gradient of the demand
curve, will be also be different. The demand curve will be kinked, at
the current price.

Even when there is a large rise in marginal cost, price tends to stick close to
its original, given the high price elasticity of demand for any price rise.

At price P, and output Q, revenue will be maximised.

Maximising profits
If marginal revenue and marginal costs are added it is possible to show that
profits will also be maximised at price P. Profits will always be maximised
when MC = MR, and so long as MC cuts MR in its vertical portion, then profit
maximisation is still at P. Furthermore, if MC changes in the vertical portion of
the MR curve, price still sticks at P. Even when MC moves out of the vertical
portion, the effect on price is minimal, and consumers will not gain the benefit
of any cost reduction.

A game theory approach to price stickiness

Pricing strategies can also be looked at in terms of game theory; that is in
terms of strategies and payoffs. There are three possible price strategies, with
different pay-offs and risks:

Raise price

Lower price

Keep price constant

The choice of strategy will depend upon the pay-offs, which depends upon the
actions of competitors. Raising price or lowering price could lead to a
beneficial pay-off, but both strategies can lead to losses, which could be
potentially disastrous. In short, changing price is too risky to undertake.
Therefore, although keeping price constant will not lead to the single best
outcome, it may be the least risky strategy for an oligopolist.

Video

The Prisoners Dilemma

Game theory also predicts that:
There is a tendency for cartels to form because co-operation is likely to be
highly rewarding. Co-operation reduces the uncertainty associated with
the mutual interdependence of rivals in an oligopolistic market. While cartels
are unlawful in most countries, they may still operate, with members
concealing their unlawful behaviour.
Cartels are designed to protect the interests of members, and the interests of
consumers may suffer because of:
1. Higher prices or hidden prices, such as the hidden charges in credit
card transactions
2. Lower output
3. Restricted choice or other limiting conditions associated with the
transaction
A classic game called the Prisoner's Dilemma is often used to demonstrate
the interdependence of oligopolists.

Examples of Oligopoly
Oligopolies are common in the airline industry, banking, brewing, softdrinks, supermarkets and music. For example, the manufacture, distribution
and publication of music products in the UK, as in the EU and USA, is highly
concentrated, with a 4-firm concentration ratio of around 75%, and is usually
identified as an oligopoly.
The key players in 2011 were:

Evaluation of oligopolies
Oligopolies are significant because they generate a considerable share of the
UKs national income, and they dominate many sectors of the UK economy.

The disadvantages of oligopolies

Oligopolies can be criticised on a number of obvious grounds, including:
1. High concentration reduces consumer choice.
2. Cartel-like behaviour reduces competition and can lead to higher prices
and reduced output.
3. Given the lack of competition, oligopolists may be free to engage in the
manipulation of consumer decision making. By making decisions more
complex - such as financial decisionsabout mortgages - individual
consumers fall back onheuristics and rule of thumb processes, which
can lead todecision making bias and irrational behaviour, including
making purchases which add no utility or even harm the individual
consumer.
4. Firms can be prevented from entering a market because of
deliberate barriers to entry.
5. There is a potential loss of economic welfare.
6. Oligopolists may be allocatively and productively inefficient.

Oligopolies tend to be both allocatively and productively inefficient. At profit

maximising equilibrium, P, prce is above MC, and output, Q, is less than the
productively efficient output, Q1, at point A.

The advantages of oligopolies

However, oligopolies may provide the following benefits:
1. Oligopolies may adopt a highly competitive strategy, in which case they
can generate similar benefits to more competitivemarket structures,
such as lower prices. Even though there are a few firms, making the
market uncompetitive, their behaviour may be highly competitive.
2. Oligopolists may be dynamically efficient in terms of innovation and new
product and process development. The super-normal profits they
generate may be used to innovate, in which case the consumer may
gain.
3. Price stability may bring advantages to consumers and the macroeconomy because it helps consumers plan ahead and stabilises their
expenditure, which may help stabilise the trade cycle.

Types of Oligopoly Market

1.

Open Vs Closed Oligopoly: This classification is made on the basis of

freedom to enter into the new industry. An open Oligopoly is the market
situation wherein firm can enter into the industry any time it wants, whereas, in
the case of a closed Oligopoly, there are certain restrictions that act as a barrier
for a new firm to enter into the industry.

2.

Partial Vs Full Oligopoly: This classification is done on the basis of price

leadership. The partial Oligopoly refers to the market situation, wherein one

large firm dominates the market and is looked upon as a price leader. Whereas
in full Oligopoly, the price leadership is conspicuous by its absence.
3.

Perfect (Pure) Vs Imperfect (Differential) Oligopoly: This

classification is made on the basis of product differentiation. The Oligopoly is
perfect or pure when the firms deal in the homogeneous products. Whereas the
Oligopoly is said to be imperfect, when the firms deal in heterogeneous
products, i.e. products that are close but are not perfect substitutes.

4.

Syndicated Vs Organized Oligopoly: This classification is done on the

basis of a degree of coordination found among the firms. When the firms come
together and sell their products with the common interest is called as a
Syndicate Oligopoly. Whereas, in the case of an Organized Oligopoly, the firms
have a central association for fixing the prices, outputs, and quotas.

5.

Collusive Vs Non-Collusive Oligopoly: This classification is made on

the basis of agreement or understanding between the firms. In Collusive
Oligopoly, instead of competing with each other, the firms come together and
with the consensus of all fixes the price and the outputs. Whereas in the case of
a non-collusive Oligopoly, there is a lack of understanding among the firms and
they compete against each other to achieve their respective targets.
Thus, oligopoly market is a market structure that lies between the monopolistic
competition and a pure monopoly.

Definition: The Oligopoly Market characterized by few sellers, selling the

homogeneous or differentiated products. In other words, the Oligopoly market
structure lies between the pure monopoly and monopolistic competition, where
few sellers dominate the market and have control over the price of the product.
Under the Oligopoly market, a firm either produces:

Homogeneous product: The firms producing the homogeneous products

are called as Pure or Perfect Oligopoly. It is found in the producers of industrial
products such as aluminum, copper, steel, zinc, iron, etc.

Heterogeneous Product: The firms producing the heterogeneous

products are called as Imperfect or Differentiated Oligopoly. Such type of
Oligopoly is found in the producers of consumer goods such as automobiles,
soaps, detergents, television, refrigerators, etc.
There are five types of oligopoly market, for detailed description, click on the
link below:
Types of Oligopoly Market

Features of Oligopoly Market

1.

Few Sellers: Under the Oligopoly market, the sellers are few, and the
customers are many. Few firms dominating the market enjoys a considerable
control over the price of the product.

2.

Interdependence: it is one of the most important features of an

Oligopoly market, wherein, the seller has to be cautious with respect to any
action taken by the competing firms. Since there are few sellers in the market,
if any firm makes the change in the price or promotional scheme, all other firms
in the industry have to comply with it, to remain in the competition.
Thus, every firm remains alert to the actions of others and plan their
counterattack beforehand, to escape the turmoil. Hence, there is a complete
interdependence among the sellers with respect to their price-output policies.

3.

Advertising: Under Oligopoly market, every firm advertises their

products on a frequent basis, with the intention to reach more and more
customers and increase their customer base.This is due to the advertising that
makes the competition intense.
If any firm does a lot of advertisement while the other remained silent, then he
will observe that his customers are going to that firm who is continuously
promoting its product. Thus, in order to be in the race, each firm spends lots of
money on advertisement activities.

4.

Competition: It is genuine that with a few players in the market, there

will be an intense competition among the sellers. Any move taken by the firm

will have a considerable impact on its rivals. Thus, every seller keeps an eye
over its rival and be ready with the counterattack.
5.

Entry and Exit Barriers: The firms can easily exit the industry whenever
it wants, but has to face certain barriers to entering into it. These barriers could
be Government license, Patent, large firms economies of scale, high capital
requirement, complex technology, etc. Also, sometimes the government
regulations favor the existing large firms, thereby acting as a barrier for the
new entrants.

6.

Lack of Uniformity: There is a lack of uniformity among the firms in

terms of their size, some are big, and some are small.
Since there are less number of firms, any action taken by one firm has a
considerable effect on the other. Thus, every firm must keep a close eye on its
counterpart and plan the promotional activities accordingly.

Kink demand curve : Kink demand curve reflects the pricing behaviour . It explains
that if one market player increases the price then it is not necessary that others will
follow the same trend by increasing the price resulting into serious profit
minimisation to the player with inflated cost.
Game theory - Game theory depicts the competitive behaviour between two market
players. If both the players will collaborate with each other then only they will get the
long term goals. But in short terms if player A will do cheat with player B then he will
definitely get benefitted and for the short term gains Player B should also compete in
this manner only to get benefitted. Nash equilibrium is a phenomenon which occurs
when each player does what is best for them, given what their rivals may do in
response

CONCLUSION
Oligopolies would like to act like monopolies, but self-interest drives them closer to competition.
Thus, oligopolies can end up looking either more like monopolies or more like competitive markets,
depending on the number of firms in the oligopoly and how cooperative the firms are. The story of the
prisoners dilemma shows why oligopolies can fail to maintain cooperation, even when cooperation is in
their best interest.

Policymakers regulate the behavior of oligopolists through the antitrust jaws. The proper scope of
these laws is the subject of ongoing controversy. Although price fixing among competing firms clearly
reduces economic welfare and should be illegal, some business practi ces that appear to reduce
competition may have legitimate if subtle purposes. As a result, policymakers need to be careful when
they use the substantial powers of the antitrust laws to place limits on firm behavior.

4. Oligopoly:
Oligopoly is a market situation in which there are a few firms selling
homogeneous or differentiated products. It is difficult to pinpoint the number of
firms in competition among the few. With only a few firms in the market, the
action of one firm is likely to affect the others. An oligopoly industry produces
either a homogeneous product or heterogeneous products.
The former is called pure or perfect oligopoly and the latter is called imperfect
or differentiated oligopoly. Pure oligopoly is found primarily among producers
of such industrial products as aluminium, cement, copper, steel, zinc, etc.
Imperfect oligopoly is found among producers of such consumer goods as

automobiles, cigarettes, soaps and detergents, TVs, rubber tyres,

refrigerators, typewriters, etc.

Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic industries have
several common characteristics which are explained below:
(1) Interdependence:
There is recognised interdependence among the sellers in the oligopolistic
market. Each oligopolist firm knows that changes in its price, advertising,
product characteristics, etc. may lead to counter-moves by rivals. When the
sellers are a few, each produces a considerable fraction of the total output of
the industry and can have a noticeable effect on market conditions.
He can reduce or increase the price for the whole oligopolist market by selling
more quantity or less and affect the profits of the other sellers. It implies that
each seller is aware of the price-moves of the other sellers and their impact on
his profit and of the influence of his price-move on the actions of rivals.
Thus there is complete interdependence among the sellers with regard to their
price-output policies. Each seller has direct and ascertainable influences upon
every other seller in the industry. Thus, every move by one seller leads to
counter-moves by the others.
(2) Advertisement:
The main reason for this mutual interdependence in decision making is that
one producers fortunes are dependent on the policies and fortunes of the

other producers in the industry. It is for this reason that oligopolist firms spend
much on advertisement and customer services.
As pointed out by Prof. Baumol, Under oligopoly advertising can become a
life-and-death matter. For example, if all oligopolists continue to spend a lot
on advertising their products and one seller does not match up with them he
will find his customers gradually going in for his rivals product. If, on the other
hand, one oligopolist advertises his product, others have to follow him to keep
up their sales.
(3) Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since under oligopoly, there are a few sellers, a move by one seller
immediately affects the rivals. So each seller is always on the alert and keeps
a close watch over the moves of its rivals in order to have a counter-move.
This is true competition.
(4) Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers
to entry into or exit from it. However, in the long run, there are some types of
barriers to entry which tend to restraint new firms from entering the industry.
They may be:
(a) Economies of scale enjoyed by a few large firms; (b) control over essential
and specialised inputs; (c) high capital requirements due to plant costs,
advertising costs, etc. (d) exclusive patents and licenses; and (e) the

existence of unused capacity which makes the industry unattractive. When

entry is restricted or blocked by such natural and artificial barriers, the
oligopolistic industry can earn long-run super normal profits.
(5) Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms.
Finns differ considerably in size. Some may be small, others very large. Such
a situation is asymmetrical. This is very common in the American economy. A
symmetrical situation with firms of a uniform size is rare.
(6) Demand Curve:
It is not easy to trace the demand curve for the product of an oligopolist. Since
under oligopoly the exact behaviour pattern of a producer cannot be
ascertained with certainty, his demand curve cannot be drawn accurately, and
with definiteness. How does an individual seller s demand curve look like in
oligopoly is most uncertain because a sellers price or output moves lead to
unpredictable reactions on price-output policies of his rivals, which may have
further repercussions on his price and output.
The chain of action reaction as a result of an initial change in price or output,
is all a guess-work. Thus a complex system of crossed conjectures emerges
as a result of the interdependence among the rival oligopolists which is the
main cause of the indeterminateness of the demand curve.
If the oligopolist seller does not have a definite demand curve for his product,
then how does he affect his sales. Presumably, his sales depend upon his

current price and those of his rivals. However, a number of conjectural

demand curves can be imagined.
For example, in differentiated oligopoly where each seller fixes a separate
price for his product, a reduction in price by one seller may lead to an
equivalent, more, less or no price reduction by rival sellers. In each case, a
demand curve can be drawn by the seller within the range of competitive and
monopoly demand curves.
Leaving aside retaliatory price movements, the individual sellers demand
curve under oligopoly for both price cuts and increases is neither more elastic
than under perfect or monopolistic competition nor less elastic than under monopoly. It may still be indefinite and indeterminate.
This situation is shown in Figure 1 where KD1 is the elastic demand curve and
MD is the less elastic demand curve. The oligopolies demand curve is the
dotted kinked KPD. The reason is quite simple. If a seller reduces the price of
his product, his rivals also lower the prices of their products so that he is not
able to increase his sales.

So the demand curve for the individual sellers product will be less elastic just
below the present price P (where KD1and MD curves are shown to intersect).
On the other hand, when he raises the price of his product, the other sellers
will not follow him in order to earn larger profits at the old price. So this
individual seller will experience a sharp fall in the demand for his product.
Thus his demand curve above the price P in the segment KP will be highly
elastic. Thus the imagined demand curve of an oligopolist has a comer or kink
at the current price P. Such a demand curve is much more elastic for price
increases than for price decreases.
(7) No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two
conflicting motives. Each wants to remain independent and to get the
maximum possible profit. Towards this end, they act and react on the priceoutput movements of one another in a continuous element of uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes
to cooperate with his rivals to reduce or eliminate the element of uncertainty.
All rivals enter into a tacit or formal agreement with regard to price-output
changes. It leads to a sort of monopoly within oligopoly.
They may even recognise one seller as a leader at whose initiative all the
other sellers raise or lower the price. In this case, the individual sellers
demand curve is a part of the industry demand curve, having the elasticity of
the latter. Given these conflicting attitudes, it is not possible to predict any
unique pattern of pricing behaviour in oligopoly markets.