Monopolistic competition and oligopoly

Monopolistic competition and oligopoly

1. Characteristics of monopolistic competition

   • Four conditions of monopolistic competition
     • Many Firms:
       • Monopolistically competitive markets are not marked by economies of scale. 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:
       • These artificial barriers 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. 
     • Little Control:
       • In a monopolistically competitive market structure, each firm's goods are a little different from everyone else's, and some people are willing to pay more for the difference. 
     • Differentiated Products:
       • Firms have some control over their selling price because they can differentiate, or distinguish their good from the other products in the market. 
   • Non Price Competition
     • Physical Characteristics:
       • The simplest way to a firm to distinguish its products is to offer a new size, color, shape, texture, or taste. 
     • Location Real-Estate
       • The three most important factors when buying property are "location. location, location." Such a location allows the seller to charge a lot more of a quart of water. 
     • Service Level
       • Some seller can charge higher prices because they offer their customers high level of service. Customers at conventional restaurants pay more for the service and relaxing atmosphere. 
     • Advertising
       • Firms often use advertising to point out differences between their own offerings and other products in the market place. 
   • Prices, Output, and Profit
     • Prices
       • Prices under monopolisitic competition will be higher than they would be in pure competition. The number of firms and ease of entry prevent companies form raising prices as high as they would if they were a true monopoly.
     • Output
       • The law of demand says that output and price are negatively related. As one rises, the other falls. As a result, total output under monopolistic competition falls somewhere between that of monopoly and that of pure competition. 
     • Profits
       • Purely competitive firms, monopolistically competitive firms earn just enough to cover all of their costs, including salaries for the workers. First, fierce competition would encourage rivals to find new ways to differentiate their products and lure customers back.
   • Characteristics of Oligopoly
     • Oligopoly
       • Describes a market dominated by a few large, profitable firms. Oligopoly looks like an imperfect form of monopoly.
     • Barriers to Entry
       • An oligopoly can form when significant barriers to entry keep new companies from entering the market to compete with existing firms. 
     • Cooperation and Collusion
       • Oligopoly presents big challenge to government, because oligopolistic firms often seem to work together as a monopoly, even when they are not actually doing so.
     • Cartels
       • It is an agreement by a formal organization of procedures to coordinate prices and production.