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Home » Economics Homework Help » Microeconomics Help » Oligopoly Characteristics
Oligopoly Characteristics
In oligopoly some special characteristics are found which are not present in other market structures. We discuss some of these characteristics below:

Interdependence the most important feature of oligopoly is the interdependence in decision making of the few firms which comprise the industry. This is because when the number of competitors is free any  change in price output product etc. by a fir will have a direct effect on the fortune of its rivals which will then retaliate in changing t5heir own price output or products as the case may be. It is therefore clear that the oligopolistic firm must consider not only the market demand for the industry product but also the reactions of the other firm in the industry to any action or decision it may take since more than one reaction pattern is possible form the other firms we have to make some assumption about the reaction of the other before we can provide a definite and determinate solution of price output fixation under oligopoly.

Importance of advertising and selling costs: a direct effect of interdependence of oligopolies is that the various firms have to employ various aggressive and defensive marketing weapons to gain a greater share in the market or to prevent a fall in their market share for this various firms have to incur a good deal of costs on advertising and on other measure of sales promotion. therefore there is a great importance of advertising and selling costs under condition of market situation characterized by oligopoly prof baumol rightly says that it is only under oligopoly that advertising comes fully into its own under perfect completion advertising by an individual firm is unnecessary in view of the fact that it can sell any amount of its product at the going price. A monopolist has also not to make any competitive advertisement since he is the only seller of a product. A monopolist may perhaps advertise when he has to inform the public about his introduction of a new model of his product or he may advertise I order to attract potential consumer’s who have not yet tried his product. Under monopolistic option advertising plays an important role because of the product differentiation that exists under it, but not as much important as under oligopoly. Under oligopoly advertising can become a love and death matter where a firm which fails to keep up with the advertising budget of its competitors may find it customers drifting off to rival products.

In view of the fact that a firm in an oligopolistic industry competes by changing the advertisement cost quality of the product prices output etc. the presence of competitive conditions in it can hardly be denied. To an oligopolistic competition can consist no in the quiescent stale meat of perfect competition where there is no battle because there is never anyone strong enough to disturb the peace rather to him true competition consist of the life of content struggle ravel against ravel which one can only find under oligopoly (or on a smaller scale under conditions of monopolistic competition.

Group begaviour: further another important feature of oligopoly is that for the proper solution to the problem of determination of price and output under it analysis of group behaviour is important. Theories of perfect competition monopoly and monopolistic completion present no difficult problem of making suitable assumption about human behaviour in case of perfect competition and monopolistic completion (with a large number of firms) the economists assume that the business firms behave in such a way as to maximise their profit. Assumption of profit maximization gives overall goods results in these situations where mass of people are involved and there is no interdependence of firm. On the other end the troy of monopoly deals with a sole individual and it is also appropriate to assume profit-maximizing behaviour on his part.

But the theory of oligopoly is a theory of group behaviour not of mass or individual behaviour and to assume profit-maximizing behaviour on the part of a product of a group may not be very valid. There are few firms in a group wich are very much interdependent given the present state of our economic and social science, there is no generally accepted theory of group behaviour. Does the member of a group agree to pull together in promotion of common interests or will they fight to promote their individual interests? Does the group possess any leader? If so how does he get the others to follow him? There are some of the questions that need to be answered by the theory of group behaviour.

Indeterminateness of demand curve facing an oligopolistic: another important feature is the indeterminateness of the demand curve facing an oligopolistic. The demand curve shows what amount visual firm demand curve is given and definite. Since a perfectly competitive firm is one among a large number of firms producing an identical product it is incapable of influencing the price of its product by its own individual action. Therefore a firm under perfect competition faces a perfectly elastic demand curve at the level of the going price in the market. on the other hand a monopolist produce a product which has only remote substitutes. Therefore a monopolist can safely ignore the effects of its own price changes on his distant reveal and therefore the monopolist faces a given and definite demand curve depending upon the consumer demand for his proud. Under monopolistic competition where there is a large number of firms producing products which are close substitutes for eachother changes in price by an individual firm will have a negligible effect on each of its many rivals. Therefore a firm under monopolistic competition can validly assume the price of its rivals to remain unchanged when it a males changes in the price of its product. Thus the demand curve for a firm under monopolistic competition can be taken as definite and is given by the buyer’s preference for its product.

But the situation under oligopoly is quite different because of interdependence of the firms in it. Under oligopoly a firm cannot assume that its rivals will keep their prices unchanged when it makes changes in its own price. As a result of this the demand curve facing an oligopolistic firm loses its definiteness and determinateness because it goes on constantly shifting as the rivals change their prices in reaction to price changes by a firm.

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