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Duopoly and Oligopoly

Monopolistic competition requires a large number of competitors and free entry and exit. Many real- world markets today, however, are made up of a small number of suppliers and entry into and exit from the industry are restricted. Oligopoly is the term used to describe such markets. Where there are only two suppliers the term duopoly is used. Oligopoly may supply a relatively homogeneous product, such as oil, or they may compete thought differenced products, for example, as in the motor car industry. The greater the product differentiation, the greater the scope to be a price- maker rather than a price-taker.

The oligopolistic interdependence in decision making has far reaching consequences for the industry, market and consumers. Since moves and consequences for the industry, market and consumers. Since moves and countermoves are closely related, since decisive strategies and tactics of one firm affect rivals’ decisions and actions, since anticipated reaction of the rival is the basis for working out the optimal decision path of the firm, the oligopolist has developed an armory of aggressive and defensive marketing weapons. For example, advertising can become a life-and-death matter where a firm which fails to keep up with the advertising budget of its competitors may find its customer drafting off to rival products.

Another realistic possibility is that in the theory the firms may enter into an agreement-they may decide to get together and cooperate in the pursuit of their common objective, but in practice they may not honor their collusive agreements in order to maximize their individual gains. Many firms may make agreements just to break them as cleverly as possible, keeping the other firms in ignorance.

Finally, the joint agreement, subject to the prevalent business and industrial laws of the prevalent business and industrial laws of the country, itself may take a wide variety of patterns. Such complexities of oligopolistic interdependence in reality often lead to a state of confusion which is as unsatisfactory to the economic analyst as it businessman who is saddled with its problem. As a result, the literature of oligopoly theory is full of different models, each model attempting to emphasise one some, but not all features of an oligopoly market. For analytical convenience, different molds and their underlying approaches can as follows:

1. Ignoring interdependence: For minor policy decision, the firm may simply ignore the entire matter on the assumption that its rival will also do so; interdependence disappears from decision making in this case.

2. Predicting rival’s countermoves: In the approach, the firm attempts to anticipate the nature of competitive reaction of his rival on the basis of guesswork of past experience and then the firm decides on strategy which is optimal in term of its assumption. A number of models, with this approach, have been developed, some of which will be described in this subsection.

3. Preparing against optimal moves by rival: In the approach of business decision making, a whole lot of literature has been developed by the name of theory of games.4 Here the businessman does not optimal moves of his rival-his competitiors’ best possible market strategy and prepares his own defense and countermeasure accordingly.