OLIGOPOLY

Business studies study module

This is a market structure where there are few firms. The firms are relatively large and command a substantial part of the market. It is a market structure between the monopolistic competition and monopoly.

Types of Oligopoly

Oligopoly may be classified according to the number of firms or the type of products they sell. They include;

  • Duopoly;This refers to an oligopoly market structure which comprises of two firms. Mastermind Tobacco and British American Tobacco (BAT) are examples of duopoly in Kenya.
  • Perfect/Pure oligopoly refers to an oligopolistic market that deals in products which are identical. Examples of pure oligopoly are companies dealing with petroleum products such as oil Libya, Caltex, Total, Shell, National Oil, Kenol and Kobil. These firm sell products which are identical such as kerosene, petrol and diesel.
  • Imperfect/Differentiated Oligopoly; this is an oligopolistic market structure where firm have products which are the same but are made to appear different through methods such as packaging, advertising and branding.

Features of oligopoly

  • Has few large sellers and many buyers.
  • The firms are interdependent among themselves especially in their output and pricing.
  • Non-price competition, firms are in a position to influence the prices. However, they try to avoid price competition for the fear of price war.
  • There is barriers to entry of firms due to reasons such as; requirement of large capital, Ownership of production rights, control over crucial raw materials, Restrictive practices etc
  • High cost of selling through methods of advertisement due to severe competition.
  • Products produced are either homogeneous or differentiated.
  • Uncertain demand curve due to the inter-dependence among the firms. Hence the shifting of the demand curve is not definite.
  • There is price rigidity i.e once a price has been arrived at in an oligopolistic market, it tends to remain stable.

This feature explains why a firm in oligopolistic market faces two sets of demand curves resulting to a Kinked Demand Curve. One curve, for prices above the determined one, which is fairly gentle and the othere curve for prices below the determined one which is fairly steep.

THE KINKED DEMAND CURVE

 

) The kinked demand curve illustrates the rigidity price behaviouroligopolists.

ii) The curve has two parts with different elasticities: AB is elastic and BC is inelastic.

iii) Sellers cannot increase price from price OPo to OP1 because the Quantity bought will decrease (fall).

iv) The sellers cannot reduce price from OP1 to OP2 because very little amount will

increase in demand.

v) The sellers will stick to price OPobecause it is the most profitable and most popular to both sellers & buyers.



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