Oligopolistic competition


5 Characteristics

1. High barriers to entry - long run supernormal profits

2. Imperfect information

3. Mutual interdependence

4. Intensive non-price competition

5. Periodic aggressive price wars

1 of 4


In oligopolies, the Kinked Demand Curve is used to illustrate why prices are sticky, which means they are stable and do not change. As shown in the diagram, P1(X) is the price adopted by the incumbent (necessary) firms, if a firm decides to raise its price (P2), no extra sales would be achieved because of the curve being relatively elastic - this means that a rise in price will lead to a greater than proportionate fall in demand. Conversely, it makes no sense for the firm to drop its prices (P3) if the rise in demand is less than proportionate to the fall in price - therefore again average revenues will fall. As a result, oligopolists must achieve more sales through non-price competition in order to gain leverage in the market.

2 of 4

Types of oligopolies

Perfect oligopoly - when oligopoly produced homogenous good e.g petrol (perfect substitutes)

Imperfect oligopoly - when oligopoly produces goods that are imperfect substitiues or differentiated in nature e.g phones 

3 of 4

Theories about Oligopoly Pricing

1. They do compete on price; profts will be the same as competitive industry

2. Firms collude to charge the monpoly price

3. Oligopoly price and profits will be between the monopoly and competitive ends of the scale

4. Oligopoly prices and profits are indeterminable

4 of 4


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Competitive markets resources »