Oligopoly is a market structure characterised by the presence of a few large firms (producing homogeneous or differentiated products) intensely competing against each other and recognising interdependence in their decision-making. In India, oligopoly is seen in industries such as automobiles, computers, A.C., photocopiers, etc.
The features of Oligopoly are:
(i) Few firms. There are few sellers of the commodity and each sells a substantial portion of the output of the industry. Each firm is aware that it possesses a large degree of monopoly power.
(ii) Homogeneous or differentiated product. Some oligopoly firms may sell homogeneous products (such as cement, steel, aluminium, LPG cylinders) or differentiated products (such as cars). Former one's are known as perfect oligopoly and the latter one is known as imperfect oligopoly.
(iii) Interdependence of decisions. There is interdependence of firms, as business decision of a single seller will have a substantial impact on the product price, output and profits of the rival firms, e.g., there is interdependence of decision between Pepsi and Coke, Hindustan Times and Times of India. Since the number of sellers is small, each firm has to take into consideration the possible reaction of rivals, when making business decisions.
(iv) Heavy selling and advertising costs. Due to cut-throat competition, firms incur heavy selling and advertising costs to counter the rival firm's action, to ensure their survival and growth in the industry.
(v) Price rigidity. Normally firms are afraid of competing with each other by lowering the price. It may start a price war and the firm who starts the price war may ultimately loose. Each rival firm reacts immediately to the changed price, due to which the price remains rigid in this market.
(vi) Group behaviour. Normally group behaviour is observed in the form of collective decisions and mutual cooperation by the firms.
(vii) Barriers to entry. This market is characterised by the presence of substantial barriers to entry of new firms in the industry. These barriers can be natural like requirements of huge capital or operating at minimum average cost due to economies of scale) or artificial (like patent rights, product differentiation barriers) which prevents entry of new firms in the industry and therefore enables the oligopolistic firms to earn profit in the long run.
(viii) Indeterminate demand curve. Due to high degree of interdependence and uncertainty among oligopolistic firms, sales and profits of the firm are affected by the rivals' firms' actions. The firm does not sometimes know how his rival firm will react to its decision regarding change in its variables. The demand curve facing an oligopoly firm keeps on shifting as rival firms react to changes made by this firm. Therefore, demand curve facing an oligopoly firm is indeterminate -ii.e., not possible to determine).