IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.
Oligopoly is a market form where large numbers of buyers contact few sellers for the purpose of buying and selling of commodities. Oligopoly is an imperfect competitive market form and it is the most existing market system in the world. We can see many industries of oligopoly, which includes automobile industry, laptop and computer, electronic equipments etc. On the basis of the nature of the market, it can be classified to many types. Here we can analyze the most important four categories of oligopoly market like,
1) Pure oligopoly
2) Differentiated oligopoly
3) Collusive oligopoly
4) Non – collusive oligopoly
Pure and Differentiated Oligopoly
Pure Oligopoly refers to a market where all the firms are producing homogenous product. There is no any kind of differences among output produced by firms, even a minute one. Here all products are perfectly substitutable. So, it can be also called as perfect oligopoly. For instance some vegetable and fruits items are supplying by few firms, where there will be no more chances for differentiated products.
An oligopoly market said to be a differentiated oligopoly when the products are produced by firms having some kind of differences. But at the same time the products are substitutable one. Since there is no any perfect uniformity in products, it can also call as imperfect oligopoly. For example, we are using laptops made by different companies which are actually substitutable. But a small kind of variations can be seen in size, color and quality etc. So, in differentiated oligopoly market, each firm is producing substitutable goods with product differentiation.
Collusive and Non – Collusive Oligopoly
Collusive and non–collusive oligopoly can be separated on the basis of agreement. If the firms in oligopoly market are functioning on the basis of an agreement between them, it becomes a collusive oligopoly. Oil and Petroleum Exporting Countries (OPEC) is the best example, where few countries are producing the commodity and they collude under the label of OPEC and it influence the price fixing, market sharing and other related policies.
Non - collusive Oligopoly market is one, where there is no any kind of agreements and conducts between the firms. Each firms running on the basis of the policies of themselves. No one will ever depend on the decision of others. Automobile industry is the best example. Where, each firm fixes their price and other matters left independently.
Two Types of Collusion
Mainly there are two types of collusion like cartels and price leadership. Before going to learn we must understand what means by cartel and its motives.
What is collusion?
Collusion refers to the agreement between few firms of an industry. So, they will stand as one and they may become a group monopoly. It may either formal or tacit agreement. If it is a tacit one the firms follow a secret agreement. Here there is no direct conduct among firms. But in a formal agreement all conditions and conducts are open. So, they take decisions jointly by a direct discussion or meeting.
Few firms in an oligopoly industry may collude on the basis of certain agreements. So, they may have the following purposes.
a) Reduce the competition between themselves and by increase profits.
b) To create a collective or group monopoly and by create a barrier for new firms which want to enter to the industry.
c) To take a decision, which is beneficial for all firms, it enables to avoid uncertainty.
Types of Oligopoly
As said above there are two types of collusion can be seen in oligopoly market. Each of them is briefly described below.
I – Cartel
An oligopoly industry can be said to be cartel when all the individual firms are running on the basis of the agreements. So, each firm can earn monopoly profits by cooperating with other firms in the agreement. It may be either international or domestic cartel. Oil and Petroleum Exporting Countries (OPEC) is an example for international cartel.
II – Price Leadership
Price leadership is another form of collusion of oligopoly firms. Actually it is a secret matter among firms. And one firm considered as the leader and fix price and related things. All the firms in the oligopoly industry will follow the rules fixed by the leader. Here there is no possibility of competition between leader and individual firms. Generally three types of price leadership can see in practice, like
i- Low cost price leadership
ii- Dominant price leadership
iii- Barometric price leadership
Each of them is briefly described below.
i) Low cost price leadership
It can be seen in an industry where each firm produces homogenous products with various costs. So, it is easier to sell large quantity for the firm who produce with low cost. So, other firms may suffer losses. Here the low cost firm acts as a leader to set price, which is beneficial for all firms in the industry.
ii) Dominant price leadership
In some market, we can see that, a few firms are producing large amount of commodity and by getting huge market share. So, they will fix their own prices and related things. Here any small firm cannot influence to fix the price. So, all the firms will follow the price which fixed by the dominant firm in the industry.
iii) Barometric price leadership
Here a firm acts as a leader of others. The leader considered as the large or most experienced or an old firm. Such firm has enough knowledge about market. So, all other firms follow his actions in price. It may be a low cost firm or a dominant firm.
Oligopoly is a market explaining the real condition of the world’s most existing market system. In oligopoly market, there are few firms supplying commodities to large customers. The above discussed oligopoly market types are categorized based on the nature of the industry.
Taha safoor on January 09, 2019:
Thank you it very helpfull to me
Amesalu on November 30, 2018:
nice explanation keep.....
Teruru Burabura on May 30, 2018:
Wow it very nice and good explanation on one type of the market structure which is Oligopoly
p@sj on September 17, 2017:
bakhtiar on May 21, 2015:
dineo on April 17, 2014:
this is very wow
sami tadesse on January 31, 2014:
wow tank you very much!!!!!
icv (author) on September 16, 2013:
thanks. I tried maximum to reduce the complexity of the topic
Dianna Mendez on September 16, 2013:
This is very intricate on the topic of competition and strategy. Well done.