What is oligopoly? State main features of Oligopoly.

Oligopoly: It is a form of the market in which there are a few big sellers of a commodity and a large number of buyers. There is a high degree of interdependence among the sellers regarding their price and output policy.

Main features of oligopoly:

1. A few firms: There are a few sellers (more than two but not many) of the commodity and each produces a substantial portion of a total output of the industry. The number of firms is so small that each seller knows that he can influence the price by his own action and that he can provoke rival firms to react.
2. Product: Products may be homogeneous like steel and fertilisers or differentiated like cars and scooters.
3. Interdependence: There is interdependence of firms for taking decision about price and output. Since there are few firms, a change in price and output of a product by any firm is likely to influence the output and profit of rival firms whose reaction may prove counterproductive. This makes the firms mutually dependent on each other in case of decisions about price and output. For example, there is interdependence of decision about price between Pepsi and Cola. If Pepsi reduces price, Coca cola may do the same substantially.
4. Selling costs: Heavy selling and advertising costs are incurred to attract customers.
5. Price rigidity: Mostly prices are stable since no firm dares to change the price for fear of retaliatory action by rival firms. Firms generally keep price at similar levels so as to avoid a price war. They resort to other methods like an advertisement to attract customers.
6. Indeterminate demand curve: Demand curve for its product is indeterminate because no firm can be sure of the demand for its product due to unsure reactions of rivals.
7. Group Behaviour: Again group behaviour in the form of collective decisions and mutual cooperation by the firm is very common.
8. Difficult entry: Entry of new firms in the industry is difficult as in monopoly. There are barriers to entry in the form of patent rights, huge capital, crucial raw material etc. As a result, firms continue to earn supernormal profits in the long-run due to almost absence of competition.

When compared with other forms of imperfect markets, we can say that if there is only one firm it is monopoly; two firms — it is duopoly; a few firms (say 5 to 10) — it is oligopoly and a large number of firms — it is monopolistic competition.