The characteristics of oligopoly are briefly explained below:
Under oligopoly the number of competing firms being small, each firm controls an important proportion of the total (industry) supply. Consequently, the effect of a change in the price or output of one firm upon the sales of its rival firms is noticeable and not insignificant. When any firm takes an action its rivals will in all probability react to it (i.e. retaliate). The behaviour of oligopolistic firms is interdependent and not independent or atomistic as is the case under perfect or monopolistic competition.
The demand curve of an individual firm under oligopoly is not known and is indeterminate because it depends upon the reaction of its rivals which is uncertain. Each theory of oligopoly therefore makes a specific assumption about how rivals will (or will not) react to an individual firm’s action.
In view of the uncertainty about the reaction of rivals and interdependence of behaviour, oligopolistic firms find it advantageous to coordinate their behaviour through explicit agreement (cartel) or implicit, hidden, understanding (collusion). Also because the number of firms is small, it is feasible for oligopolists to establish a cartel or collusive arrangement. However, it is difficult as well as expensive to monitor and enforce an agreement or understanding. Very few cartels last long, particularly when oligopolistic firms significantly differ in their cost conditions.
Under oligopoly, new entry is difficult. It is neither free nor barred. Hence the condition of entry becomes an important factor determining the price or output decisions of oligopolistic firms, and preventing or limiting entry an important objective.
Given the indeterminacy of the individual firm’s demand and, therefore, the marginal revenue curve, oligopolistic firms may not aim at maximization of profits. Modern theories of oligopoly take into account the following alternative objectives of the firm:
Sales maximization with profit constraint.
Target or “fair” rate of profit and long-run stability.
Maximization of the managerial utility function.
Limiting (preventing) new entry.
Achieving “satisfactory” profits, sales, etc. That is, the firm is a “satisficer” and not “maximizer”.
Maximization of joint (industry) profits rather than individual (firm) profits.
In view of the fact that the characteristics of oligopoly renders collusion (explicit or implicit cartel) advantageous and feasible, theories of oligopoly are divided into three broad groups, namely, models of non-collusive oligopoly, models of collusive oligopoly, and managerial theories.
The important models of non-collusive oligopoly are: (a) Cournot model, (b) Kinked demand curve models.
The two major theories of collusive oligopoly are: (a) Joint profit maximization, and (b) Price leadership.
Emphasizing the distinguishing characteristics of joint stock enterprises are the three models of managerial theory, namely,
(a) Sales maximization with profit constraint, (b) Maximization of managerial utility function, and (c) Firm as a satisficer (behaviourist theory).