What is Oligopoly?
In an oligopoly market, each firm is huge enough to control a significant portion of the market. Output quotas and the price have a direct bearing on the output and the price of rival firms in the market. So, there is no unique demand curve for an oligopoly firm. They form a collusive agreement among the firms to fix the price and output in the market. It is to avoid price competition and earn monopoly profits.
As there is a high degree of interdependence between the firms, the firm’s demand curve is indeterminate under oligopoly. The price and output policy of one firm has a significant impact on those of the rival firm in the market. It is hard to estimate a change in a firm’s sales caused by a change in the price. A clear relationship between the price and the sales cannot be established in the market.
Types of Oligopoly
- Pure oligopoly: Pure oligopoly is a form of the market in which the products of the firms are homogeneous.
- Differentiated oligopoly: It is a form of the market in which the products of different firms are different but are close substitutes of each other.
- Collusive oligopoly: Collusive oligopoly is a form of market in which few firms form a mutual agreement to avoid competition. They form a cartel and fix the output quotas and the market price. The leading firm in the market is accepted by the cartel as a price leader. All the firms in the cartel accept the price as fixed by the price leader.
- Non-collusive oligopoly: It is a form of market in which there are a few firms in the market. Each firm has its price and output policy independent of the rival firms in the market. All the firms are able to increase their market share through competition in the market.
Monopsony refers to a market where there is a single buyer of a commodity or service but there are many sellers. The monopsonist is capable of influencing the supply price of his purchases by the amount he buys. He can bring down the price of the product or factor service by reducing the number of purchases. However, he purchases more quantities of the product and so has to pay more. He regulates his purchases in a way that marginal costs equal marginal utility.
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