In case the number of firms is small and the action taken by one firm is followed by rival firms in the market, it is then to be studied within a separate framework of a monopolistic competition called Oligopoly.
Characteristics of Oligopoly
- A small number of firms
Oligopoly is a market structure characterized by a few firms. This is different compared to the perfectly competitive market and the monopolistic market that consist of a large number of sellers whereas there is only one sole seller in the monopoly market.
Due to the small number of firms, an oligopoly firm is perceived t have the power to determine price but each firm must consider the action of competitors that is predicted to influence its decision in determining price, output and carrying out advertising campaigns.
As a result, oligopoly firms are considered as mutually dependent on the profit of each firm, not only dependents on the strategies of price and sales, but also on the action of its competitors. The characteristic of mutual interdependence that exists among these firms is an oligopoly industry makes it hard to analyze the behavior of a certain firm.
- Homogeneous Goods and Goods that can be differentiated:
In terms of goods oligopoly firms may produce wither homogeneous goods or differentiated goods. Most of the goods produced such as zine, aluminum, cement, and steel are homogeneous goods.
Meanwhile, consumer goods such as an automobile, electronic equipment, cigarettes, breakfast cereals and sports equipment are goods that can be differentiated. For goods that can be differentiated, firms will usually conduct non-price competition such as advertising.
- Barriers to Entry:
Firms are an oligopoly market also face barriers as in the monopoly market. There are a few important barriers that influence the number of firms in the market. The small number of firms enables each firm to make enough sales to achieve economies of scale. For new firms, they only control a small portion of market share and definitely will not be able to achieve economies of scale. This means they run production will a high average cost and eventually, they will not be able to sustain in the industry.