Republic of the Philippines
UNIVERSITY OF RIZAL SYSTEM
Binangonan, Rizal
GRADUATE SCHOOL
Subject: DBA 610- Advanced Microeconomics
Topic: Oligopoly
Professor: Dr. Virgilio V. Salentes
Presenter: Mary Rose T. Aragon
Introduction
Market structure refers to factors which determine the level of competition and
profitability in a market. This can be defined as the number of firms producing the
identical goods and services in the market and whose structure is determined on the
basis of the competition prevailing in that market.
Basic types of market structures:
Perfect Competition Monopolistic Competition
Homogeneous good
Numerous firms
Free entry and exit
Differentiated good
Many firms
Free entry and exit
Oligopoly
Monopoly
Differentiated good
Few firms
Barriers to entry
One good
One firm
No entry
Oligopoly (“oligi” means few and “polien” means to sell) is defined as a state of
limited competition, in which a market is shared by a small/few number of producers or
sellers selling a homogeneous or differentiated products.
Basis of Product Differentiation
Oligopoly may be classified as Homogeneous, Pure or Perfect Oligopoly and
Imperfect or Differentiated Oligopoly. Thus, differentiated oligopoly will exist where
the competing firms produce products which are close substitutes but not perfect
substitutes.
Characteristics of Oligopoly
1. Interdependence – interdependence in decision making of few firms which
comprise the industry.
2. Advertising – Each firm under oligopoly can start an aggressive advertising
campaign with the intention of capturing a large part of the market.
3. Group Behaviour - Each firm under oligopoly knows that its actions will have
some effect on other firms in the group.
4. Competition - Each seller under oligopoly is always on alert and keeps a close
watch over the moves of its rivals in order to have a counter-move.
5. Barriers to Entry of Firms - Tend to restrain new firms from entering the
industry.
6. Lack of Uniformity - Firms in oligopoly are differ considerably in size.
7. Existence of Price Rigidity - Each firm under oligopoly has to stick to its price
8. No Unique Pattern of Pricing Behaviour – Each firm under oligopoly wants to
remain independent and to get the maximum possible profit.
Republic of the Philippines
UNIVERSITY OF RIZAL SYSTEM
Binangonan, Rizal
Various Forms of Oligopoly
1.
2.
3.
4.
Perfect and Imperfect Oligopolies
Open and Closed Oligopolies
Collusive Oligopoly
Partial and Full Oligopoly
Sources of Oligopoly
There are certain reasons which have led to the emergence of oligopoly, below
are the list of Factors that give rise to oligopoly:
1. Large Investment of Capital:
No entrepreneur will like to venture to invest large sums in an industry in which
addition to output to the existing one may likely to depress prices.
2. Control of Indispensable Resources:
A few firms may control some indispensable resources which may enable them
to secure several advantages in costs over all others. This enables them to operate
profitably at a price at which others cannot survive.
3. Legal Restriction and Patents:
In public utility sector, the entry of new firms is closely regulated through the
grant of certificate by the state. This policy of exclusion of rivals may be due to
diseconomies of small scale or of duplication of services. Another factor for the
emergence of oligopoly is the patent right which a few firms acquire in matter of some
goods.
4. Economies of Scale:
A few firms can meet the entire demand for the product. The firms attain such a
huge size that a few of them can satisfy the entire demand.
5. Superior Entrepreneurs:
In some industries there may be some superior entrepreneurs whose costs are lower
than inferior rivals. These entrepreneurs under sell and eliminate most of their rivals.
6. Mergers:
Many oligopolies have been created by combining two or more independent
firms. The main motives of mergers include increasing market powers, more resources,
economies of scale and market extensions etc.
7. Difficulties of Entry into the Industry:
Prospective entrants to an industry are deterred by the difficulty of marketing new
products or new brands in the presence of already well- established, well entrenched
brands.