Differences between monopolistic competition and oligopoly market structures

Oligopoly and Monopolistic Competition

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nDifferences between monopolistic competition and oligopoly market structures

nOligopoly and monopolistic competitive market structures have a wide range of differences. Oligopoly is a kind of structure in the market, which have few of large producers. Therefore, the industry contain large amount of products from small number of firms (Mankiw 2012). Moreover, these large companies have high market shares. It is difficult to enter the market because these firms create a barrier. On the other hand, monopolistic competition is a type of structure in the market with many sellers, which are small (Nicholson and Snyder 2012). In this case, there is relative chance to exit or enter the market. Every company in monopolistic competition has small market share.

nSince in oligopoly markets there are hurdles to enter the market, firms are able to gain huge amounts of profits. The profits help these firms to sustain their businesses in the long term, which increase the entry barrier (McEachern 2013). Consequently, other competitive companies intending to enter this kind of market are restricted. In this regard, a few firms can venture in oligopolistic industry. For instance, the automobile manufacturers industry represents an oligopoly marker because it is very difficult for other firms to enter because of huge cost incurred in the process of beginning a new firm from scratch (Mankiw 2012). On the contrary, since monopolistic markets have few or no entry hurdles as compared to oligopoly, they are able to earn large amount of profits for a short period. In this case, large amounts of profits are not sustainable because the industry experiences pressures in competition because other companies can exit or enter freely (Layton, Robinson and Tucker 2011). For instance, starting a small restaurant has few barriers because they are relatively small amount of cost required.

nEntry and exist barriers in an oligopoly market are caused by economies of scale. Nevertheless, in monopoly market, patents, government policies, high cost in capital, technology and huge cost of distribution cause entry barriers (Mankiw 2012).

nThe geographical market size influence whether a firm become monopoly or oligopoly. For instance, a company may be dominant in a certain geographical area in a particular industry since there are no substitute products. Therefore, the firm become monopolistic in that geographical region. On contrast, three or four companies may be selling the same product across the country (Nicholson and Snyder 2012). Therefore, in small geographical area a company may operate as monopoly but in larger area work in oligopoly market. Large number of sellers in a geographical area characterizes monopolistic competition. For in a certain town, the number of restaurants is high. On the other hand, small number of sellers in a specific area characterizes oligopoly. For instance, in a certain town, there are a small number of automobile manufacturers because of the barriers involved.

nIn a monopolistic competition, sellers can set higher prices for services or goods since there is little competition (Nicholson and Snyder 2012). More importantly, prices are higher in this industry because there is only one seller in the market. On contrast, an oligopoly prices are usually reasonable because competition exist. Nonetheless, prices in oligopolistic markets are normally higher than they should be in a seamless competition (McEachern 2013). Companies in oligopoly markets influence the industry by developing their customer service, marketing approaches and prices.

nMore significantly, companies in oligopoly markets are able to conspire aiming to set new prices of the product instead of competing. Their collaboration makes them to work as if they are running a single company because of similar marketing strategies, and prices. In this case, the market structure can changes to monopoly from oligopoly (Nicholson and Snyder 2012). However, in monopoly market, it is not easy for companies to collude since the competition is high leading to lower prices.

nImpact of Market Structure upon Consumer

nIn oligopoly market, there is no price competition because of few marker entrants. In some industry, these firms collude forming a cartel, which fixes prices between them. It also helps the companies to restrict forces of competition in the industry (McEachern 2013). For instance, OPEC is considered a cartel in the oil industry, which colludes to increase prices leading to abnormal profits.

nOligopoly market, Source (Mankiw 2012)

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nIn this figure DD, represent the demand in the industry, which is controlled by a cartel. Moreover, MR shows the marginal revenue while the MCc is the marginal cost of the cartel, which is the marginal cost of individual companies. The aim of the cartel is to set the price in order to gain maximum profit. Therefore, every member of the organization operates, as a single firm hence become monopolistic (Mankiw 2012). At this point the MCc = MR, fixing price = P. Every member of a cartel is determined to use this price aiming to acquire huge profits (Mankiw 2012). For instance, at one time the OPEC cartel decided to increase the oil prices leading to skyrocketing prices and high standard of living.

nMonopolistic competition is able to produce product differentiation between firms as they attempt to persuade customer that their goods are better than those of their competitors are. Therefore, firm should sell products that are similar to their competitors but imperfect alternates (Layton, Robinson and Tucker 2011). Therefore, firms try to improve the quality of products in order to persuade more customers in the real world. Similarly, they are able to improve innovation to meet the demands of their customers. Additionally, they use branding and advertising to convince their consumers that their products are unique relative to their competitors (Dransfield 2013). Consequently, consumers are forced to pay more in some products although they may not be better than other products.

nMonopolistic competitive, Source (Dransfield 2013)

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nIn the long-term, the monopolistic competition is expected that other businesses are gaining profits. Consequently, others firms are enticed to join the market. The new entrants introduce new products leading to increase in the alternatives goods. Therefore, other businesses lose their market share causing downward shift in demand curve. In the long term, firms in monopolist competition do not earn any economic profits (Dransfield 2013). The demand reduces to D1 from D0 finally it reaches at the tangent of curve of average total cost (ATC). Therefore, at point B, there is no economic profit.

nTherefore, monopolistic competition serves the interest of the customer because it produces value choices. Moreover, it helps to provide quality services or goods in the market aiming to obtain market edge. Furthermore, it helps the firms to improve their market share and earn extra profits through innovation (Gans 2011). Other firms in the industry also attempt to improve their products to attract customers.

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nReferences

nDransfield, R., 2013. Business Economics. Hoboken: Taylor and Francis.

nGans, J., 2011. Principles of economics. South Melbourne, Vic.: Cengage Learning.

nLayton, A., Robinson, T. and Tucker, I., 2011. Economics for today. South Melbourne, Vic.: Cengage Learning.

nMankiw, N., 2012. Principles of microeconomics. Mason, OH: South-Western Cengage Learning.

nMcEachern, W., 2013. Microeconomics. Mason, Ohio: South-Western.

nNicholson, W. and Snyder, C., 2012. Microeconomic theory. Mason, Ohio: South-Western/Cengage Learning.