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Monopolistic Competition and Oligopoly Market Structures

A monopolistic market refers to the market structure with a high number of sellers each occupying a specific market segment that is not dominated by others. In an oligopolistic market structure, there exist a large number of sellers always present in the market and controlling the majority of the output in the market. In an oligopolistic markets structure, there are fewer small firms that cannot compete with the few large firms that have control over the market, and thus determine the price of the goods in the market (Morton & Goodman 2013, p. 2).

The fact that the oligopolistic markets have larger firms dominating the market poses stiff competition in the market of products and services. This means that the oligopolistic market players will concentrate on a particular market share, invest in the markets and then gain leverage that gives them a competitive advantage over the other smaller firms. With this economy of scales, the oligopolistic market players will be in a position to produce at higher prices and still sell at lower prices (see Fig. 1).

Oligopolistic market.
Fig. 1. Oligopolistic market. Source: Heertje and Perlman (2013).

This means that the cost incurred by then oligopolistic market players will be higher while the prices of the products and services remain lower. With this strategy, the oligopolistic market players will be able to prevent the entry of new competitors into the market. Perhaps, it will be very difficult for the new entrants to finance the high cost of production while at the same time struggling to keep with the low prices of goods and services that the oligopolistic market players are offering (Dhalla & Oliver, 2013).

Barrier to exit and new entrants into the oligopolistic market means that the oligopolistic market players will operate for quite a long time without facing substantial competition from new entrants thus registering very high profits considered abnormal profits in the long run (Dhalla & Oliver, 2013). The barrier in an oligopolistic market is meant to keep off the new entrants that may want to come and take a share of the abnormal profit that the oligopolistic market players are earning in the long run.

In monopolistic market structures, there is no barrier to entry into the market or exit from the market. This means that unlike the oligopolistic market structure, it will be possible for a new entrant to come into the monopolistic markets economy and give the monopoly competition. Perhaps this results from the fact that the monopoly will not have any way of making the market competitive to keep off the new market entrant (see Fig. 2).

Monopoly market structure.
Fig. 2. Monopoly market structure. Source: Jain and Khanna (2011).

Similarly, once new entrants have begun invading the monopolistic market economy, the former monopolies will begin experiencing a reduction in profit below the ordinary profit they have been earning. Thus, some monopolistic market players may opt to leave the market as soon as the market begins to face stiff competition from new entrants (Sexton 2012, p. 14). Monopolistic market players are therefore only in a position to earn abnormal profit in the short run before its market is invaded by new entrants who will pose competition, taking a portion of its market share thus reducing the amount of profit the monopoly earns. As such, the monopoly will not be in a position to earn any considerable abnormal profit in the long run (Lakka, Michalakelis, Varoutas, & Martakos, 2013).

In oligopolistic economies, the firms are interdependent from each other. This means that whenever a firm decides to lower its prices so as to make more sales, the sales will not increase as expected since the other competitor who depends on this firm will also respond with a counter-strategy. This means that the firms will implement a price reduction to ensure that the other rival does not make more sales out of the reduced prices (Dhalla & Oliver, 2013). The ultimate result of this is an increase in sales with a smaller margin, as illustrated above.

Sometimes price wars may result in the loss of revenues by oligopolistic players. This means that the oligopolistic players would opt to compete through non-price wars so that they avoid losing revenue. As such, the oligopolistic players would prefer to use after-sale services and promotion to win the customers to their products (Dhalla & Oliver, 2013). Besides, the oligopolistic players would prefer creating brand loyalty that would work well with the customers so that they can outcompete with their competitors (Tucker 2014, p. 18).

There is no interdependence in a monopolistic market. This means that the firms in a monopolistic competition will not engage in price wars as a means of winning customers and countering the price strategy of its rival (Lakka et al. 2013). The price reduction of one monopolistic player will not trigger a price reduction by its competitor. Instead, monopolistic market players are considered market takers and can set their own prices depending on their need. The availability of substitutes however bereaves monopolistic market players from the opportunity to control the prices of their products as they would want. This means that monopolistic markets lack stability of prices as the case of oligopolistic market structures.

One may wonder why all these types of market structures exist in an economy, however, once the advantage of on one over another is determined, it will be possible to tell which of these market structures is the most preferable for a consumer. This will require the comparison of the benefits that a consumer will get from each market structure and then determine what kind of disadvantage the other market structure will bring to the consumer (Hirschey 2012, p. 12).

The best market structure is an oligopolistic market where there are fewer suppliers who dominate the market. The price wars are beneficial to the consumers because they will lead to prices reduction. Besides, the move by the oligopolistic market players to engage in non-price wars creates more value and quality of products and services. In monopolistic market structures, there is no room for quality provision since the players are independent (Lakka et al. 2013). This means that they would hardly response to the force of demand and supply in the market.

References

Dhalla, R & Oliver, C 2013, ‘Industry identity in an oligopolistic market and firms’ responses to institutional pressures,’ Organization Studies, vol. 34, no. 12, pp. 1803-1834.

Heertje, A & Perlman, M 2013, ‘Evolving technology and market structure: Studies in manual. New York, N.Y: National Council on Economic Education.

Hirschey, M 2012, Fundamentals of managerial economics. South-Western/Cengage Learning, Mason, OH.

Jain, T R & Khanna, O P 2011, Business economics, V K Publications, New Delhi.

Lakka, S, Michalakelis, C, Varoutas, D, & Martakos, D 2013, ‘Competitive dynamics in the operating systems market: Modeling and policy implications,’ Technological Forecasting and Social Change, vol. 80, no.1, pp. 88-105.

Morton, J S & Goodman, R J B 2013, Advanced placement economics: Teacher resource Schumpeterian economics, University of Michigan Press, Ann Arbor.

Sexton, R L 2012, Exploring economics, Thomson/South-Western, Mason, OH.

Studies in Schumpeterian economics, University of Michigan Press, Ann Arbor, MI.

Tucker, I 2014, Survey of economics, South-Western Cengage Learning, Mason, OH.