monopolistic competition and oligopoly

monopolistic competition and oligopoly

1. monopolistic competition

   • Many companies compete in an open market to sell products that are similar but not identical. 
   • Four conditions of monopolistic competition
     • Many Firms :
       • monopolistic competitive markets are not marked by economies of scale. because firms earn money after a small initial investment, new firms spring up quickly to join the market. 
     • Few artificial barriers
       • the  monopolistically competitive  market includes many competing firms that producers cannot work together to keep out new competitions
     • Little control over price
       • Each firms goods are a little different from  everyone else's. This is why firms have a little control over the price, because people might be wiling to buy their product. However they cant change price too high or low because the costumer will easily switch to another firm. 
     • Differentiated products
       • The ability to differentiate goods is the main way that monopolistic competition differs from pure competition. Differentiation enables a monopolistically competitive seller to profit from differences between his or her products and competitors' products. 
   • Non-price competition:
     • or competition through ways other than lower prices. non-price competition takes several different forms. 
     • Physical characteristics
       • The simplest way to distinguish a firm's product is to offer a new size , color, shape, texture, or taste.  
     • Location Real-estate
       • goods can be differentiated by where they are sold. It can either succeed or fail based on their location. 
     • Service level
       • sellers can charge more because they offer their customers a high level of service 
     • Advertising , image or status
       • Firms use advertising to point out the differences between their products and others firms products. 
   • Prices, outcome, and profits
     • Prices
       • Prices will be higher than in pure competition. In the other hand it will prevent them from raising prices as if they were a monopoly because of the competition they have. 
     • output
       • total output under monopolistic competition falls somewhere  between that of monopoly and that of pure competition. 
     • Profits
       • Monopolistically competitive firms can earn profits in the short run, they have to work hard to keep their product distinct to stay ahead of their rivals. 

2. Characteristics of Oligopoly

   • An oligopoly describes a market dominated by a few large, profitable firms.
   • Barriers to Entry
     • An oligopoly can form when significant barrier to entry keep new companies from entering the market to compete with existing firms. This barriers can be technological or they can be created by a system of government license or patents.
   • Cooperation and Collusion
     • Oligopoly presents a big challenge to government, because oligopolistic firms often seem to work together as a monopoly, even when hey are not actually doing so. The three practices that concern government the most are price leadership, collusion, and cartels. 
     • Price war
       • When competitors cut their prices very low to win business.
     • Collusion
       • Refers to an agreement among members of an oligopoly to illegal set prices and production levels.
       • Price Fixing
         • An agreement among firms to sell at the same or very similar prices.
     • Cartels
       • Stronger than a collusive agreement, a cartel is an agreement by a formal organization of producers to coordinate prices and production.