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 for Monopolistic Competition
     • Many Firms
       • Monopolistically competitive markets are not marked by economies of scale. They do not have high start up costs meaning 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 of entry. Patents do not protect anyone competition because they have either expired or because each firm sells a distinct enough product.
     • Little control over price
       • 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.
       • Differentiation
         • It enables a monopolistically competitive seller to profit from the differences between his or her products and competitors' products. 

2. Non-Price Competition

   • The ability to differentiate products means that firms do not have to compete on price alone. This competition can take many other 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
     • Real-estate agents say that the most important factor when buying a property is location. Some goods can be differentiated by where they are sold.
   • Service level
     • Some sellers can charge higher prices because they offer their costumer a high level of service.
   • Advertising, image, or status
     • Firms often use advertising to point out differences between their own offerings and other products in the market place.

3. Prices, Output, and Profits

   • Prices
     • Prices under monopolistic competition will be higher than they would be in pure competition, because firms have some power to raise prices.
   • Output
     • The law of demand says that output and price are negatively related. As one rises, the other falls.
   • Profits
     • Like purely competitive firmss, monopolistically competitive firms earn just enough to cover all of their costs, Including salaries for the workers.

4. Characteristics of Oligopoly

   • Oligopoly
     • Describes a market dominated by a few large, profitable firms.
   • 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 a big challenge to government, because oligopolistic firms often seem to work together as a monopoly, even when they are not actually doing so. 
     • Price war
       • When competitors cut their prices very low to win business.
       • Collusion
         • Refers to an agreement among members of an oligopoly to illegally set prices and production levels.
     • Price Fixing
       • An agreement among firms to sell at the same or very similar prices.
   • Cartels
     • An agreement by a formal organization of producers to coordinate prices and production.