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Economic Theory

Mahindra etc.); TV manufacturers (BPL, Videocon, Onida, LG, Samsung,
Sony etc.) etc. are the examples of oligopoly. Oligopoly is of two kinds:
Pure Oligopoly. It is a market where the products are homogenous.
There is mutual interdependence between firms. Any change in price by

one firm has a substantial effect on the sales of other and cause them to
change their price. Examples of pure oligopoly are found in such industries

as cement, coal, gas, steel, etc.
Differentiated Oligopoly. Under differentiated oligopoly, products are
close substitutes for each other. Price change by one firm has less direct
effect upon rival firms. Examples of differentiated oligopoly are

refrigerators, television sets, air-conditioners, automobiles, scooters,
motorbikes, instant coffee, etc.
Characteristics of Oligopoly. Some of the important features of

oligopoly are as follows:
1. Interdependence: Under oligopoly, a firm cannot take independent
price and output decision. As the number of competing firms is limited,
therefore, each firm has to take into account the reactions of the rival

firms. Price and output decisions of one oligopoly firm has considerable
effect on the price and output decision of the rival firms.
2. Indeterminate demand curve: An oligopoly firm can never predict

sales correctly. It can never be certain about the nature and position of its
demand curve. Any change in price or output by one firm leads to a series
of reactions by the rival firms. As a result, the demand curve of the
oligopoly firm remains indeterminate (indefinite and shifting). Thus, under

oligopoly a price, once determined, continues to prevail for a long time.
3. Role of selling costs: Advertisement, publicity and other sales

techniques play an important role in oligopoly pricing. Oligopoly firm
employs various techniques of sales promotion to attract large number of
buyers and maximize the profits. Selling cost has a direct bearing on the
sales of the oligopoly firm.

4. Price rigidity: Oligopoly firm generally sticks to a price, which is
determined after a lot of planning and negotiations, with the competing
firms. A firm will not resort to price cut, as it would lead to retaliatory

actions by the rival firms resulting in price war. An oligopoly firm will
also not raise the price because the rival may not follow suit and, as a
result, the firm will lose many of its customers.
5. Group behavior: Price and output decisions of one oligopoly firm

have direct effect on the competing firms. Interdependence of the firms
compels them to think in terms of mutual co-operation. Firms try to

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