What are the similarities and differences between monopolistic and oligopolistic market structures?

Table of Contents Show

Differences Between Monopoly and Oligopoly
Key Differences Between Monopoly and Oligopoly
Comparative Table
Recommended Articles
Monopolistic Competition
Differences
Market Size and Control
Dominance – An Indicator of the Structure
Geographical Area
Barriers to Entry

In a monopoly market, a single seller dominates the market and has the ultimate power to control the market prices and decisions. In this type of market, customers too have limited choices. On the other hand, in an oligopoly market, there are multiple sellers. As a result, there is a huge and never-ending competition to stand out.

You are free to use this image on your website, templates, etc, Please provide us with an attribution link

Source: Monopoly vs Oligopoly (wallstreetmojo.com)

Differences Between Monopoly and Oligopoly

You are free to use this image on your website, templates, etc, Please provide us with an attribution link

Source: Monopoly vs Oligopoly (wallstreetmojo.com)

Key Differences Between Monopoly and Oligopoly

There is a single seller of goods in the market in a monopoly. In an oligopoly, there are few sellers in the market.
There is no competition among the sellers in a monopoly as they are the only ones in the market. In contrast, there are few sellers in the market in an oligopoly, and there is intense competition.
In an oligopoly, the customer has various product choices and is mainly driven by the price, customer preference, and brand loyalty. In contrast, the customer has no option or alternative to pick among the goods in a monopoly.
In an oligopoly, the demand curveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more of the market is kinked. While, in a monopoly, the demand curve is downward sloping.

In the long run, in an oligopoly market structure, the seller ends up making the normal profitThe term "normal profit" is used when the profit is zero after accounting for both the implicit and explicit expenses, as well as the overall opportunity costs. It happens when all of the resources have been used to their full potential and cannot be put to better use.read more in the industry as any change in the price will be counter-set by the subsequent fall in the cost of the rival firm. Whereas, in the case of monopoly, there is a possibility that the seller can earn abnormal profitsProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. read more in the long run.
The price set by the monopoly is generally controlled or monitored by the government to protect the customers’ interests. For example, electricity is an example of a monopoly marketMonopoly is the “one-&-only” seller of a good or service in the market & it faces no competition from any other entity. Generally, it is controlled or monitored by the Government to safeguard the customers’ interests. read more where there is only one producer of goods. On the other hand, oligopoly is driven by private players in the market. For example, a brand of toothpaste has many closely related substitutes, which is an example of an oligopoly market.

Comparative Table

Monopoly	Oligopoly
A market structure is dominated by a single seller of the goods and the services.	A market structure where numerous sellers sell close substitutes of the goods. Large industries generally dominate the market.
The seller controls the price as there is no competition in the market.	The competition in the market determines the price and keeps in mind the competitor’s actions.
This market structure is a high barrier to entry and exit as the industry is generally capital intensive. There are also economic, institutional, or legal restrictions on this kind of industry.	In this market structure, the barrier of entry is generally high because of the economies of scale in the industry.
A firm is a price maker.	A firm is a price taker.
The demand curve of the market is kinked.	The demand curve of the market is downward-sloping.
Electricity, railways, and water are examples of the monopoly market.	FMCG and automobiles are examples of an oligopoly industry.
No competition exists as there is a single seller of the goods.	Intense or high competition among the sellers.

Oligopoly

As already discussed, it represents a structure, which contains a fewer number of relatively larger firms with substantial barriers to entry of other firms. A high level of concentration is observed in the market as it is shared by a few firms. Firms, operating in an oligopoly market, do not have a lot of competition. Therefore, they have to consider the reaction of its close competitors while taking any business decision. For example, if Texaco plans to increase its stake in the market by lessening the product price, it has to take into account the likelihood of its rivalries, like British Petroleum, reducing their prices as a consequence.

As far as the market strategy is concerned, firms in the oligopoly market structure have to take key decisions regarding prices and competition. For example, they have to figure out whether they wish to compete with competitors or come to a common understanding with them; it also includes a decision to change the price or keeping it constant. Furthermore, it is also vital for them to decide if they should be the first to impose a new strategy or wait for the competitors’ moves. The benefits of going first or second are known as the first mover and second mover advantage. Sometimes, it is better to take the initiative as it enables a firm to make sufficient profits, and other times, it is better to wait and see what competitors have to offer.

Monopolistic Competition

On the other hand, in a monopolistic competition, the structure contains a large number of small firms that can exercise a freedom of entry and exit. In this model, every firm has multiple competitors, yet, each one of them offers slightly different goods. In this cluster of enterprises, each one takes independent decisions about the price and outcome by keeping in mind the market it operates in, a product it sells, and the related cost of production. Although, there is a greater flow of knowledge in the market, yet, it doesn’t depict a perfect market.

The main feature of this market structure is the ability of its products to be differentiated in four categories, including marketing differentiation, human capital differentiation, differentiation through distribution, and physical product differentiation.

Since all the firms involved in monopolistic competition offer unique products, it enables them to charge a lower or higher price than their competitors, which also indicates that demand curve will be plunging. Under the monopolistic competition, firms usually go for advertising to market their products, because of the high level of competition with their rivalries. Advertising helps them in introducing the distinctive features of their product as compared to the rest of the market.

Moreover, such firms are considered to be profit maximizers. This is because their businesses are smaller, which allows them to keep their focus in managing a business.

Differences

Both monopolistic competition and oligopoly depict an imperfect competition. Following are some of the major differences between these two market structures:

Market Size and Control

The main difference between both the market structures is a relative size and market control of these firms on the basis of a number of competitors in a particular market. However, there is no dividing line between these structures, for example, there is no clear definition of how many firms should there be in a market in order for it to be a monopolistic competition or oligopoly market.

Dominance – An Indicator of the Structure

There are a few cases where it is the dominance of some firms that determines the type of structure a market has. For example, an industry that consists of 4000 relatively same firms is mostly considered as a monopolistic competition, whereas, an industry with the same number of firms, out of which, only 4 are relatively large and dominating, is known as the oligopoly market. The most prominent example of oligopoly market is petroleum industry, wherein, despite having a large number of companies, the market is dominated by a few major companies.

Geographical Area

Another feature that distinguishes the monopolistic competition from oligopoly is a geographical area. It is a key factor in identifying a market structure. It is possible that a particular industry falls into a category of oligopoly market if it lies in a small city, and a monopolistic competition if it has a presence in a large city. An example of this can be a retail market. If you shop in a large city, you will have hundreds of thousands of shopping alternatives, including shopping malls, supermarkets, mini marts, and nationwide retail chains. Such a market represents a monopolistic competition.

Small towns are comparatively less equipped with such retail outlets and have only a few stores. It may only have one shopping mall and a small number of stores present in a downtown area. Such a structure is called oligopoly.

Barriers to Entry

As it has already been discussed, oligopoly represents high barriers to entry as compared to the monopolistic competition, but it is a matter of degree. The key element that can give rise to oligopoly market is a requirement for government authorization, especially in circumstances where entry is restricted to only a few firms. On the other hand, it can also be representative of monopolistic competition if a large number of firms are allowed to enter into a market.

Apart from government authorization, resource ownership and startup cost also restrict the entry of firms at different levels, leading to either of the two structures. These barriers keep changing from time to time, transferring monopolistic competition into an oligopoly and vice versa.

All in all, each market structure represents its own specific traits and has a tendency to show variation as the time goes by, with the change of geographical area, market size, trends, and demands for a particular product. Understanding each structure is very important for a business and even for a consumer in order to take their strategic decisions successfully. In both the markets, firms take control either by controlling the supply of their respective products or services so as to elevate the demand, or by controlling prices, and hence, controlling what a consumer pays for those products.

Help us improve. Rate this post!