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The word ‘Oligopoly’ is derived from the Greek words ‘Olig’ meaning a few and ‘Poly’ meaning sellers. Thus, a market form in which there are only a few sellers is called ‘Oligopoly. It is one type of imperfect competition.

There are two types of oligopoly viz. pure oligopoly producing identical products and differentiated oligopoly producing similar but not identical products.

Pure oligopoly is called perfect oligopoly and differentiated oligopoly is known as imperfect oligopoly. Oligopoly is the most prevalent type of market and of the greatest importance today. It is otherwise known as multiple monopoly or incomplete monopoly. It is different from monopolistic competition where there are many sellers.

Under oligopoly, each firm produces and sells a considerable portion of the total output sold in the market. Prof. Watson writes that many of the American markets are oligopolistic.

According to Prof. G.J. Stigler, “Oligopoly is that situation in which a firm bases its market policy in part on the expected behavior of a few close rivals.” Examples of perfect oligopoly are Aluminum and Steel. Examples of imperfect of differentiated oligopoly are Automobiles and Cigarettes. Where there are only two sellers, the market is called Duopoly. The main features of oligopoly are stated below.

Six main features of oligopoly

1. A few sellers:

Oligopoly implies a few sellers. It is different from monopoly with one seller and monopolistic competition with many sellers and perfect competition with innumerable sellers.

2. Identical or differentiated products:

Oligopoly may be perfect or imperfect. Perfect oligopoly is called pure oligopoly. It produces and sells identical or homogeneous products. Imperfect or differentiated oligopoly produces and sells heterogeneous products.

3. Interdependence:

It is the most important feature of oligopoly. Oligopoly consists of a few firms. But the firms are interdependent in so far as their price output decisions are concerned. The firms sell products which are good substitutes of one another. This implies that products have high cross elasticity of demand. Moreover, the pricing decisions made by one firm must be considered by other firms. Each firm produces a substantial part of the total supply. The reactions of rivals to pricing and output decision are the most important in oligopoly. The decisions of one firm affect the profits of other firms. No firm, therefore, can take independent action without considering the reactions of other firms. The pricing of oligopoly is compared to playing cards. Robinson calls oligopoly as cat and mouse monopoly.

4. Group behavior:

The theory of oligopoly is the theory of group behavior. The few competing firms are interdependent in their decisions on price output policy. Reactions of rivals to pricing and output decision are very important. Members of the group may agree to form combination to promote their common interest of profit maximisation. Or, they may fight to promote their individual interests. A wide variety of behavior patterns becomes possible in oligopoly. There may be price leadership or price war. Profit maximising assumption blankets them all, conceals their individual differences and give good results.

5. Selling costs and advertisement:

Under oligopoly, rival firms employ aggressive and defensive market weapons. The purpose of this is to gain a greater share in the market or to maximise its profits and minimise its losses. Various firms incur enough expenditure on advertising and sales promotion measures. Prof. Baumolhas rightly said. “It is only under oligopoly that advertising comes fully into its own.” If one oligopolist advertises his product, other oligopolists follow him to keep up their sales. Thus, advertisement can become a life and death matter for a firm under oligopoly.

6. Indeterminate demand curve:

Mutual interdependence of firms creates an atmosphere of uncertainty. No firm is able to know correctly the result of the price output policy of its rivals. There is lack of uniformity in the size of firms. Some may be small others may be very large. Besides, true competition consists of the life of constant struggle among the rivals. This can be only be found in oligopoly. The exact behavior pattern of a producer under oligopoly cannot be known. The reactions of the rival firms change from time to time. The demand of an oligopolist firm changes from time to time too. The rival firms change their strategy of output and price. Hence, the demand curve of an individual firm goes on changing. Therefore, the demand curve of an oligopolistic firm is indeterminate. Interdependence among the rival oligopolists is the main cause of the indeterminateness of the demand curve under oligopoly.