Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Oligopoly firms operate under imperfect competition: 
 
In an oligopoly firm operate under imperfect competition, the 
demand curve is kinked to reflect inelasticity below market price 
and elasticity above market price, the product or service firms offer 
are differentiated and barriers to entry are strong. Following from 
the fierce price competitiveness created by this sticky-upward 
demand curve, firms utilize non-price competition in order to accrue 
greater revenue and market share. 
Oligopsony is a market form in which the number of 
buyers are small while the number of sellers in theory could be 
large. This typically happens in market for inputs where a small 
number of firms are competing to obtain factors of production. This 
also involves strategic interactions but of a different nature than 
when competing in the output market to sell a final output. 
Oligopoly refers to the market for output while oligopsony refers to 

---

the market where these firms are the buyers and not sellers (e.g. a 
factor market).
 
Oligopoly is interdependence between firms: 
 
The 
important 
characteristic 
of 
an 
oligopoly 
is 
interdependence between firms. This means that each firm must 
take into account the likely reactions of other firms in the market 
when making pricing and investment decisions. This creates 
uncertainty in such markets - which economists seek to model 
through the use of game theory. 
Oligopolies do not compete on prices: 
 
Oligopolies do not compete on prices. Price wars tend to 
lead to lower profits, leaving a little change to market shares. 
However, Oligopolies firms tend to charge reasonably premium 
prices but they compete through advertising and other promotional 
means. Existing companies are safe from new companies entering 
the market because barriers to entry to the market are high. For 
example, if products are heavily promoted and producers have a 
number of existing successful brands, it will be very costly and 
difficult for new firms to establish their own new brand in an 
oligopoly market.