Oligopoly is an important type of imperfect competition in economy. It is a market situation where there are few firms or sellers selling either differentiated or homogenous products. The term few sellers generally imply is the number of sellers ranging from two to ten. But it is not necessary that the number should be exactly between these two limits. A slight variation in the upper limit could also be accepted. The lower limit of oligopoly is duopoly which is a market situation consisting of two sellers. Each seller in an oligopolistic market enjoys a significant part of the total supply and hence each seller is strong enough to exert influence over the pricing policies of other competing firms.
There are only few sellers in oligopoly. Even if the sellers are few every seller can influence the market because each one enjoys a significant portion of the total market. Any change in the price output policy of any single seller will have a likely effect on the sales of other competing firms. Mutual interdependence among the firms is the most important feature of oligopolistic situation. Due to this, any steps taken by a seller to push up his sales either by price reduction or by any other means will adversely affect the sales of other firms. This will invoke reactions from the affected firms to counter the actions that result in loss of sales.
The products in an oligopoly market are either homogenous or differentiated. The products of industries like steel, aluminum, cement, etc. are homogenous and are produced under oligopolistic conditions. On the other hand, products of industries like automobiles and household appliances are heterogeneous products produced under oligopolistic conditions. The significance of advertising and selling expenses is more in oligopoly. To protect the existing market and also to gain more market share oligopoly firms have to indulge in aggressive and defensive marketing strategies.