Monopolistic Competition and Oligopoly

Monopolistic Competition and Oligopoly

1. Monopolistic competition and Oligopoly

   • Oligoply
     • Describes a market dominated by a few large, profitable firms. Oligopoly looks like an imperfect form of monopoly. Some economists call an industry an oligopoly if the four largets firms produce at least 70 to 80 percent of the output.  Acting on their own or as a team, the biggest firms in an oligopoly may well set prices higher and output lower than in a purely competitive market.
     • Barriers to entry
       • An oligopoly can form when significant barriers to entry keep new companies from entering the market to compete with existing firms. These barriers can be technological, or they can be created by a system of government licenses or patents. In other cases, the conomic realities of the market lead to an oligopy. 
       • High start-up costs
         • Suchs as expensive machinery and large production facilities present additional barriers to entry. 
       • Economies of scale
         • Greater economies of scale mean that there will be fewer firms in an industry. In a monopoly market, only one company can produce enough goods to earn a profit. In an oligopoly perhaps three or four companies can reach a profitable level of output before the market becomes too crowded and revenue falls below costs. 
     • Cooperation and Collusion
       • Oligopoly presents a big challenge to government, because oligopolistic firms often seem to work together as a monopoly, even when they are not actually doing so. Many government reuglations try to make oligopolistic firms act more like competitive firms. When determined oligopolists work together illegally to set prices and bar competing firms from the market, they can become as damaging to the consumer as a monopoly.  
       • Price leadership
       • Collusion
       • Cartels
         • Stronger than a collusive agreement. It is an agreement by a formal organization of producers to coordinate princes and production. Cartels can survive only if every member keeps to its agreed-upon output levels. Otherwise, prices will fall, and firms will lose profits. However, each member has a strong incentive to cheat and produce more than its quota. If every cartel member cheats, too much product reaches the market, and prices fall

2. Non-price competition

   • The ability to differentiate products means that firms do not have to compete on price alone, the alternative is competition through ways other than lower prices. These are the forms
   • Physical characteristics
     • The simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture, or taste.
   • Location
     • Some goods can be differentiated by where they are sold. Gas stations, movie theaters, and grocery stores succeed or fail based on their locations. 
   • Service level
     • Some sellers can charge higher prices because they offer their customers a high level of service. 
   • Advertising, image, or status
     • Firms often use advertising to point out difference between their own offerings and other products in the marketplace. These product differences are often more a matter of perception than reality. 

3. Forms

   • Many Firms
     • As a rule, monopolistically competitve markets are not marked by economies of scale. They do not have high start-up costs. Because firms can begin selling goods and earning money after a small initial investment, new firms spring up quickly to join the market.
   • Few artificial barriers to entry
     • Firms in a monopolistically competitive market do not face high barriers to entry. Patents do not protect anyone from competition. either because they have expired or because each firms sells a product that is distinct enough to fall outside the zone of patent protection. Just like a purely competitive market, a monopolistically a competitive market includes so many competing firms that producers cannot work together to keep out new competitors.
   • Little control over price
     • Each firm's goods are a little different from everyone else's, and some people are willing to pay more for the difference/ For this reason, firms have a bit of freedom to raise or lower their prices. Only has limited control over price. 
   • Differentiated products
     • Firms have some control over their selling price because they can differentiate, or distinguish their goods from the other products in the market. The abiliy to differentiate goods is the main way that monopolisic competition differs from pure competition. 
     • Differentiaion
       • Enables a monopolistically competitive seller to profit from the differences between his or her products and competitors' products

4. Prices, Outputs, and profits

   • Prices
     • under monopolistic competition will be higher than they would be in pure competition, becuase firms have some power to raise prices. However, the number of firms and ease of entryprevent companies from raising prices as high as they would if they were a true monopoly. As you have read, if a monopolistically competitive firm raising prices as high as they would if they were a true monopoly. 
   • Outputs
     • The law of demand says that output and price are negatively related. As one rises the other falls. Monopolistcally competitive firms sell their products at higher prices than do purely compeititve firms, but at lower prices than a monopoly.
   • Profits
     • Like purely competitive firms earn just enough to cover all their costs., including salaries for the workers. If a monopolistcally competitive firm started to earn profits well above its costs.