Meaning and Definition of Oligopoly

? Meaning and Definition of Oligopoly Simple Explanation: The word oligopoly comes from two Greek words: “oligi” means few, and “polein” means to sell. So, an oligopoly is a market where only a few companies sell a product. These products can be the same (homogeneous) or different (differentiated). It is also called “competition among the few”, because only a few big firms control the market. Each company’s actions affect the others — if one company changes prices or makes a new product, the others react quickly. Example: In India, the automobile market (cars) is an oligopoly because a few big companies — Tata, Maruti, Hyundai, Ford — dominate it. The steel and cement industries also show oligopoly, because there are only a few producers. Special case – Duopoly: A duopoly is a special type of oligopoly where there are exactly two sellers. Examples: Pepsi and Coca-Cola in soft drinks. Airbus and Boeing in airplane production. Intel and AMD in computer processors. ? Types of Oligopoly There are four main types of oligopoly: 1?? Pure or Perfect Oligopoly Meaning: When all firms sell the same or identical products, it is called a pure oligopoly. There is no difference between their products. Example: Industries like cement, steel, aluminum, or chemicals are examples. Each company sells similar goods — one company’s cement is almost the same as another’s. In the graph (if shown): The demand curve is similar for each firm because products are homogeneous — buyers don’t care much which brand they buy. 2?? Imperfect or Differentiated Oligopoly Meaning: When firms sell different types of the same kind of product, it’s called a differentiated (imperfect) oligopoly. Here, products are not identical, but they are close substitutes. Example: Passenger cars (Toyota, Honda, BMW – all cars but different brands). Soft drinks (Pepsi, Coca-Cola – taste and brand are different). Cigarettes (different flavors and packaging). In the graph (if shown): Demand curves for each firm are slightly different, because customer preferences depend on brand differences. 3?? Collusive (or Cooperative) Oligopoly Meaning: When firms cooperate with each other to decide price or output, it’s a collusive oligopoly. They may make a group called a cartel to fix prices and production levels. Example: OPEC (Organization of Petroleum Exporting Countries) is a cartel of oil-producing countries that coordinate production to control oil prices. Why cartels are illegal: Because they are unfair and harm consumers by: Increasing prices artificially Reducing competition and innovation Blocking new companies from entering Controlling markets and resources Penalties: Individuals: up to 10 years in jail or big fines Companies: up to $10 million or 10% of turnover In the graph (if shown): All firms act together like one big monopoly ? they choose the price where total industry profit is highest. The graph usually looks like a single monopoly curve, showing high price and low output. 4?? Non-collusive (or Non-cooperative) Oligopoly Meaning: When firms do not cooperate and instead compete with each other, it’s non-collusive oligopoly. Each firm sets its own price and strategy, reacting to rivals. Example: Car companies (like Toyota, Hyundai, Ford) compete — if one lowers price, others may follow. In the graph (if shown): Each firm’s demand curve depends on what competitors do. Price changes can cause quick reactions — this leads us to the Kinked-Demand Theory (next topic). ? Features of Oligopoly (B1 English Explanation) Oligopoly markets have some special features that make them different from other market structures. 1?? Few Firms In an oligopoly, there are only a few large firms that control most of the market. Each firm produces a big part of the total output, so competition is very strong. ?? Example: In India, the car market (Maruti, Tata, Hyundai, Ford, Honda) is an oligopoly — there are only a few companies selling cars, but they control almost the whole market. Each firm watches its rivals carefully, because one firm’s decision (like changing price or product) affects all the others. 2?? Interdependence Firms in an oligopoly are interdependent. This means the decision of one firm depends on how other firms will react. ?? Example: If Tata Motors lowers the price of a car, Hyundai and Maruti may also lower their prices to keep their customers. So, every firm must think about its competitors before deciding price or output. 3?? Non-Price Competition Oligopoly firms try to avoid price wars because if one reduces the price, others will follow, and everyone earns less. Instead, they use non-price competition — other ways to attract customers. ?? Examples: Advertising Better customer service New product design Free gifts or discounts This leads to price rigidity — prices remain stable even when demand or cost changes. 4?? Barriers to Entry There are high barriers to entry in oligopoly. New firms find it difficult to enter the market because of: High start-up cost (large capital) Patents or brand control Access to important raw materials As a result, existing firms can continue to earn high or abnormal profits in the long run. ?? Example: New companies cannot easily enter the car or airline industry because they need a lot of money, technology, and government permission. ? Summary: Feature Meaning Example Few Firms Only a few large firms dominate the market Car industry Interdependence Each firm’s decision affects others One lowers price ? others follow Non-Price Competition Firms compete using advertising, quality, etc. Soft drink companies Barriers to Entry Difficult for new firms to enter Airline or steel industry ? Kinked-Demand Theory Simple Meaning: In an oligopoly, each firm must think about how other firms will react if it changes its price. There are two possible reactions: Other firms follow the price change. Other firms do not follow the price change. This difference creates a kink (a bend) in the demand curve — that is why it’s called the kinked-demand theory. ? Explanation: If a firm increases its price , other firms will not follow , because they want to attract more customers. ? So, customers leave the firm that raised the price ? demand becomes very elastic (customers react a lot). If a firm decreases its price , other firms will follow , because they don’t want to lose their customers. ? So, demand becomes inelastic (customers don’t react much, because all firms have similar prices). As a result, the demand curve has a kink — a sharp bend — where elasticity changes. ? Graph Explanation (as in your file): The upper part of the demand curve (D1) is elastic ? when price rises, customers move to other firms. The lower part of the demand curve (D2) is inelastic ? when price falls, all firms follow, and no firm gains customers. The Marginal Revenue (MR) curve also has a gap between MR1 and MR2. ? Because of this gap, even if marginal cost (MC) changes (goes up or down a little), the firm does not change its price — it keeps it stable. That’s why prices in oligopoly are sticky or rigid — they don’t change often. ? In short: Firms don’t like to change prices often. If they raise price ? lose customers. If they lower price ? rivals copy them ? profit falls. So, they keep prices stable ? price rigidity . Example: Car companies like Toyota or Hyundai often keep similar prices. Even if costs change a bit, they prefer not to change prices — they use ads or promotions instead. ? Oligopoly and Game Theory ? What is Game Theory? Game Theory is a way of studying how two or more people (or firms) make decisions when their actions affect each other. In economics, it helps us understand how firms in an oligopoly decide prices, output, and research spending. Because there are only a few firms, each one must predict what others will do before making a decision. ?? Example: Two big car companies — Toyota and Ford. If Toyota spends a lot of money on research (R&D), Ford must decide: should it also spend, or save money? If Ford doesn’t spend, Toyota may become stronger in the market. So both companies usually choose to invest — this is their best strategy. ?? The Prisoner’s Dilemma This is the most famous example in game theory. It shows how two people or firms may not cooperate even if it would be better for both to do so. ? Story: Two prisoners, A and B, are caught by the police. They are questioned separately and cannot talk to each other. They have two choices: Confess (tell the truth) Deny (stay silent) Prisoner B Confess Prisoner B Deny Prisoner A Confess (3 years, 3 years) (1 year, 10 years) Prisoner A Deny (10 years, 1 year) (2 years, 2 years) ? Explanation: If both confess , they each get 3 years in prison. If one confesses and the other denies , the one who confesses gets 1 year, but the other gets 10 years. If both deny , they get only 2 years each. The best result for both is to deny, but they don’t trust each other. Each one thinks, “If I deny and the other confesses, I get 10 years!” So, both choose to confess — even though that gives them a worse result. This is called the Nash Equilibrium — each person chooses the best strategy for themselves, given what the other is doing. ? Applying it to Business The same logic works for firms in an oligopoly. Imagine two companies — Firm A and Firm B — producing similar goods. Firm B High Output Firm B Low Output Firm A High Output £5m, £5m £12m, £4m Firm A Low Output £4m, £12m £10m, £10m ? Explanation: If both firms produce high output , price will fall, and both get only £5 million. If one produces less (low output) and the other produces more (high output), the one that produces more earns £12 million, the other only £4 million. If both limit production (low output) , price stays high, and both earn £10 million. So the best total result is for both to choose low output. But because they cannot trust each other (just like the prisoners), each firm prefers to protect itself and produce high output. This is the dominant strategy — each firm acts for its own benefit, even if it hurts both in the end. ?? Real-World Example: ? Tesco Fined for Cartel Pricing (2011) Tesco and some milk companies were fined for price collusion — they secretly agreed to raise prices together. This shows how firms in oligopoly sometimes collude (act together) to earn higher profits, even though it’s illegal. ? Summary Table Concept Meaning Example Game Theory Study of strategic decisions Car companies deciding R&D Prisoner’s Dilemma Each firm acts in self-interest ? both lose Two rivals both cut prices Nash Equilibrium Best strategy for each given others’ choices Both confess or both produce high output Dominant Strategy Always best choice for a player Confess (for prisoners) Collusion Firms secretly agree to fix price Tesco milk price case ? In short: Oligopoly firms know that they depend on each other. If they cooperate, they can all earn more — but usually, they don’t trust each other, so they compete, and profits go down.