Solution:

Oligopoly:

• An oligopoly is a market structure in which there are a few sellers of a product selling identical or differentiated products.

• If they are selling identical products, it is a case of pure oligopoly and if they are selling differentiated products, it is a case of differentiated oligopoly. In this case, each firm has to take into account the price being charged by the others.

• One studies the reaction curves of the other firms and in this way the firms are interdependent.

• They may even charge a high price if they agree and there is no pricing policy under oligopoly because of the kinky shape of the demand curve which is a broken one.

• Thus, price rigidity and price war are the common features of oligopoly.

The various features and characteristics of oligopoly are discussed as follows:

(1) Relatively small number of sellers:

• There is a relatively small number of sellers under an oligopoly market structure selling identical or differentiated products. Each seller controls a large part of the demand and the policies of every seller influence the price and output of the industry as a whole.

(2) Interdependence of the firms:

• Under the oligopoly market structure all the firms are sailing in the same boat and every tilting position influences each of the firms as well with equal proportion. No firm can be neutral.

• They depend on each other while determining the price and output of the firm.

(3) Price rigidity and price war:

• Price rigidity and price was are the common features of an oligopoly market structure. Each firm retaliates and acts according to the actions of the other firms and a tug of war starts between them which is better known as the 'Price War' which further paves the way to price rigidity.

(4) Difficulty in entry and exit:

• Under oligopoly, the entry and exit of the firms are banned.

• The new firms cannot enter the market as the old firms have complete hold over the market conditions and the firms are also reluctant to leave because of the huge investment made by them.

(5) Selling costs:

• Under an oligopoly market structure, each firm pursues an aggressive and defensive marketing strategy to control the market. Advertisement is an important method used by oligopolists to control the bigger part of the market.

(6) Indeterminateness of the demand curve:

• Under an oligopoly market structure the shape of the the demand curve is broken and is indeterminate because the firms cannot assume that the rival firms will not make a change in their price policy in response to a change in price affected by it.

• Thus, the fact that the reaction pattern of the rival firms are indeterminate leaves the demand curve in an indeterminate position.

(7) Complex Market Structure:

• The market structure of oligopoly is quite complex. As there is a possibility of rival firms ending rivalry by working out some policy of collusion and the collusive oligopoly manifests itself in the form of a combination of rival firms to fix the same price and also share in output as in the case of cartels.

• Besides it, non-collusive oligopoly is also found in practice which presents a complex market structure.