The decision making of the constituent firms of oligopoly is interdependent. This is because when the number of competitors is few, any change in the price, output, product etc. by the firm will have a direct effect on the rival firms as well, and who will then retaliate by changing their own price, output or product. Thus an oligopolistic firm must consider not only the market demand for the industry’s product but also the reactions of the other firms in the industry. More than one reaction pattern may be possible so it’s difficult to provide a definite and determinate solution of price output fixation under oligopoly.
As a direct effect of interdependence only, the oligopolistic firms have to employ various aggressive and defensive marketing weapons to gain a greater market share or to prevent a fall in its market share. For this the firms have to incur a great deal of costs on advertising and other means of sales promotion of the selling costs are very major. If a firm fails to keep up with the advertising and selling cost budget of its rival then it may lose its customers to the rival product. This signifies the competitive element of the oligopoly also since the firms in the industry compete by changing the advertising costs, product quality, price, output etc. hence this is sometimes called the truly competitive scenario as well.
For proper price output determination under oligopoly analysis of group behavior is very important. The theory of oligopoly is the theory of group behavior not of mass or individual behavior and to assume profit maximizing behavior on the part of a producer or a group may not be valid.
Because of the interdependence of firms, a firm under oligopoly cannot assume that its rival will keep its prices unchanged when it makes changes in its own prices. The demand curve facing an oligopolist thus loses its definiteness and determinateness because it goes on constantly shifting as the rivals change their prices in reactions to the price changes by the firm.
two or more than two sellers or producers but not many.
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