Oligopoly: Examples Of Monopolistic Products

Examples of Monopolistic Products

D. Oligopoly

The term oligopoly was derived from two Greek words, “Oligoi” meaning a few and “pollein” meaning to sell. Oligopoly is a market situation with few enough sellers of homogeneous or differentiated products.

1. Classification of Oligopoly

a. Based on Product Differentiation

• Pure or Perfect Oligopoly - products of the firms are homogeneous or identical

• Imperfect or Differentiated Oligopoly – products of firms are differentiated

b. Based on Entry of Firms

 Open Oligopoly – complete freedom for new entrants to the industry. There is no restriction or barrier to entry.

• Closed Oligopoly – new firms are not allowed to enter

c. Based on Price Leadership

• Partial Oligopoly -

They combine together to avoid competition among themselves regarding price and output of the industry.

• Non-Collusive Oligopoly – a market situation where there is no agreement among the firms, hence each firm acts independently.

2. Characteristics of Oligopoly

a. Very few sellers of the product The number of sellers dealing in homogenous or differentiated product is very small that the pricing and output policy of the individual firm can influence the industry price and output. Each firm controls a large share of the market, hence, changing its output will make a noticeable effect on market activities.

b. Interdependence

An oligopolist has to take into consideration the actions and reactions of other oligopolists in its pricing and output determination. The cross price elasticity of demand for their products is very high because of the availability of close substitutes. This is also the reason why firms do not normally like to change their prices and output levels.

c. Presence of monopoly

Preparing against optimal moves by the competitors

The firm calculates the optimal moves of its competitors’ strategies and prepares its own defenses and countermoves. This approach is associated with the game theory.

4. Kinked Demand Curve

The Kinked demand curve suggests firms have little incentive to increase or decrease prices or the earlier discussed price rigidity. In theory, the kinked demand curve suggests an explanation for why prices are stable.

If a firm increases its price, it becomes uncompetitive, hence reduction in demand for its product, showing that demand is price elastic for a higher price. This means increasing price would lead to a fall in revenue.

However, if firm decreases price, they would gain market share. It is assumed in this situation other firms also do not want to lose market share, hence they also cut prices too. Therefore, for a price cut, demand is price inelastic. Problems with Kinked demand Curve Model

1. Empirical evidence to support this model is very weak. Prices do change in Oligopolistic markets much more often than this model suggests.

2. The kinked demand curve doesn’t say why prices were reached in the first place.

3. Oligopoly makes assumptions about the behavior of firms in response to price changes that firms in reality may not