It is the unique feature of oligopoly. Every firm under oligopoly has to be conscious of the reaction of the rivals.
As the number of firms is a few, any change in output, product, price, etc. by one firm will have a direct effect on the fortunes of others who will naturally, retaliate by changing their own prices, output, product, etc.
Each firm will have to estimate, as best as it can, the nature of its rival’s reaction to its product, price, output, etc. policies.
Thus, there is very close interdependence in the decisions of firms in the oligopoly market. Every move in policies by one firm leads to countermoves by other firms.
3. Indeterminate demand curve:
The oligopoly in characterized by interdependence. Under oligopoly the demand curve of each firm’s product is indeterminate because the behaviour of rivals is uncertain and unpredictable.
The impact of change in price and advertisement cannot be ascertained accurately because of counter moves by rival firms.
Thus demand curve cannot be drawn accurately, since the traditional assumption of “other things being equal” does not apply here.
4. Aggressive and defensive marketing methods:
Oligopoly firms resort to various aggressive or defensive marketing techniques to increase their share of the market or to maintain their share of market.
They resort to extensive advertisement and sales promotion. Prof W.J. Bannal has rightly said, “Under oligopoly advertising can become a life and death matter.” The reason is that every oligopolistic faces a fierce competition.
5. Competition and combination:
In oligopoly the competition is not perfect. There may be fierce, violent, cruel and cut throat competition on the one hand. But on the other hand oligopolist realize the disadvantage of competition and rivalry. Therefore, the oligopolist firms may work out some policy of collusion to avoid harmful competition.
6. Entry of new firms:
The ease of entry may be measured by Bain’s concept of the ‘condition of entry’ which is given by the expression.
The condition of entry is a measure of the amount by which established firms in an industry can raise their price above Pc without attracting entry
In conclusion we can say that the theory of oligopoly is a study of group behaviour not of mass or individual behaviour, but of behaviour of small group of firms.
Here profit maximization behaviour of firms is not a very- valid assumption. There are a few firms in a group which are very much interdependent in their behaviour.
There is no single accepted theory of such group behaviour. Thus, there can be various models of oligopolistic behaviour, each based upon (a) degree of interdependence, and (b) case of entry of new firms in the industry.
The degree of interdependence of firms may be measured by an unconventional degree of cross elasticity of demand for the products of firms.