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Perfect Competition And Oligopoly

1. Interdependence:

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.

in pure competition where there are numerous firms selling perfectly homogeneous products and can sell as much as they want at the ruling market price over which they have no control and mass behavior theories are valid.

2. Importance of advertising and selling costs:

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.

In perfect competition the advertisement by a single firm is unnecessary because the firm can sell as much as it wants at the market price.

3. Group behavior:

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.

In perfect competition where numerous firms are present and there is no interdependence, we can easily assume the mass behavior of profit maximization.

  1. indeterminateness of demand curve facing an oligopolist :

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.

Since the firms under perfect competition cannot influence the market price their demand curve is a perfectly elastic horizontal straight line.

  1. number of firms :

In case of perfect competition there are large number of firms (at least > 10 ) while in an oligopoly there may be at least 2 but not many firms.

  1. profit maximization assumption :

in perfect competition a determinate solution to the price output problem is arrived at by assuming profit maximizing motive on the part of firms. In an oligopolistic situation it might be reasonable to assume sales maximization objective on the part of firms or maybe even maximization of the firms’ utility function or growth rate. Or the oligopolist may not maximize anything but may just satisfy i.e. achieve satisfactory profits. Hence the price and output may just be indeterminate.

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