Oligopoly Competition Explained with Example

An oligopoly is a form of market structure in which there are a few firms selling a product so that there is intense competition among them.

Features of Oligopoly are:-

  1. Few firms
  2. Intense competition
  3. ‘Interdependence
  4. The barrier to entry of the firms
  5. Indeterminate demand curve

The kinked shaped demand curve

  • Under Oligopoly, the demand curve is neither a straight line nor a downward sloping curve, it is a kinked shaped demand curve and so it is indeterminate.
  • Oligopoly takes into consideration the formation of cartels too, price leadership, and joint formation of cartels.
  • The form of Oligopoly with product differentiation has a kinked demand curve. Kink lies at the point where the highly elastic demand changes the route to the less elastic demand.
kinked demand oligopoly
The graph shows the two demand curve with different elasticity. The green one is highly elastic and the orange one is less elastic. The price and output are determined at the point of Kink (K).

Oligopoly case study -Telecom industry in India

There are two major players in the Telecom industry, namely Airtel and Jio. It's a classic example of Oligopoly.

  • If Airtel increases the price of its product, Jio won't increase the price. Airtel's existing customer would go to Jio for a lower price. At this point, the demand is elastic.
  • If Airtel decreases the price of its product to attract the Jio's customers. Jio would decrease the price of its products as well. So Jio's customers won't subscribe for Airtel, as Jio has also decreased the prices. At this point, the demand is inelastic. 

  • Oligopoly not only has the kinked demand curve, but it resorts to playing games too. Game theory under economics is a subject of Oligopoly as a whole. Matrixes are formed of strategies and payoffs and the respondents get according to their choice. The most rational decision wins. Example- The automobile industry.
  • Earlier the Oligopoly game was introduced as the Prisoner’s Dilemma where the criminals were the respondents and out of a matrix of four columns, they were supposed to select one according to their rational decision and intuition about what the other criminal would select.
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