Difference Between Oligopoly and Monopolistic Competition
Length: 378 words (1.1 double-spaced pages)
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An oligopoly market structure is one in which there are a few large
producers who are present in the industry and account for most of the
output in the industry, there are many small firms but these few large
firms dominate and have concentrated market shares.
Whereas monopolistic competition is a market structure that has a
large number of sellers, each of which is relatively small and posse a
very small market share.
Another feature of an oligopoly is that there are some barriers to
entry and exit into the industry. In the short run, oligopolies are
able to earn abnormal profit, but in the long run as well they are
able to sustain abnormal profits due to the barriers to entry and
The barriers act as a strong deterrent to firms that want to come into
the industry and " eat into" the abnormal profits and then exit the
industry. Thus not many firms dare to venture into the industry;
therefore oligopolies can earn abnormal profits in the long run as
well unlike firms in monopolistic competition.
In monopolistic competition there are no barriers to entry or exit, so
as with oligopolies, in short run they earn abnormal profits, but they
cannot sustain this level of abnormal profits in the long run due to
competitive pressures since other firms are free to enter and exit the
industry and often firms enter and " eat into" the abnormal profit of
the monopolistic producers as shown in the graphs below.
In an oligopoly, firms are interdependent, e.g. as shown in the graph
below, if firm X decides to lower its price from B to D, sales should
increase from A to C but since firms are interdependent, other firms
would retaliate and lower their prices too. So for firm X sales would
increase only by AE not AC.
But since " price wars" only lead to a loss in revenue for these firms
they often choose to engage in non- price competition, i.e.
the product itself or improving promotions via after sales service or
competitions, in order to encourage brand loyalty.
In monopolistic competition, firms are independent of each other, this
means that, if as in an oligopoly a firm reduces price, other firms
would not follow suit. Monopolistic firms are not price takers like
those in perfect competition, so they can increase its price without
losing all of its customers. But because there are many close
substitutes, monopolistic firms have relatively weak market power.
Another distinctive feature of an oligopoly is that there is relative
price stability. As shown in the graph below, between price W and V,
the marginal revenue earned by the firm is the same so increasing the
price would not change their income thus they would fix a price.
Price stability is not a key feature in monopolistic competition as it
is with oligopolies.