| Oligopoly is a market structure in which a small number of firms are highly interdependent on each other. Unlike in monopolistic competition, where each firm has a free exit and no product differentiation, oligopolistic firms have to consider how their actions affect their competitors. This can be difficult, since there are only a few firms in a market, and they all have different product characteristics.
The main characteristics of oligopoly are price rigidity, interdependence, and barriers to entry. Price rigidity occurs when every firm is influenced by the actions of other sellers, making the selling price of the products unstable. In oligopoly, the demand curve of a product is kinked. Kinked demand curves are similar to traditional demand curves, but the curve shows a convex bend at the bottom.
Interdependence is the primary characteristic of oligopoly. There is huge interdependence between firms, and this can make it difficult for a new firm to enter a market. For example, if Texaco cuts its price on a product, other firms in the oligopoly market must follow the same move. If they do not, they could lose a large portion of their customers. They are therefore unlikely to change their prices. But they must also consider the potential impact of a change on the other firms in the oligopoly.
Barriers to entry are the primary reason why there are so few firms in oligopoly markets. While some companies have access to legal privileges, such as patent rights, others must meet large capital requirements before they can join the industry. Another reason is that new firms with a bad reputation may not be accepted. Also, a companys profit margin can vary dramatically depending on its size, which makes it difficult for a new entrant to enter the market.
As a result, firms in oligopolies are reluctant to raise their prices. Instead, they rely on non-price methods, such as advertising and after-sales services. These strategies can build brand recognition, and provide more opportunities for profit. However, these tactics do not result in a significant increase in the demand for the products. A better strategy is to maintain the same price. If you want to get more details about characteristics of oligopoly, you may visit on Auto Precaution.
Oligopolistic markets are also highly prone to price wars. This is because each firm is influenced by the actions of the other firms, and the only way to prevent a price war is to avoid it. Often, a firm will try to determine whether a price war is likely to occur. When a price is set, a firm will want to know how its competitors will react. Depending on the firm\'s response, the firm may then change its price. This can cause a loss of customers, but it can also allow the firm to capture a large portion of the market.
Oligopolies have a number of advantages over monopolistic markets, such as high profit margins, freedom of exit, and the ability to charge higher prices. Firms in oligopolies have more money to invest in research, and can expand their margins.
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