ii. Group : D
iii. Module Title : Economics in an International Context iv. Assessment Title : Essay
v. Assignment Title : Differences between oligopoly and monopolistic competition market structures. vi. Tutor name : Hind Francesca
vii. Student ID : 200893206
viii. Date of submission : 15/3/2012
ix. Word Count : 986
Differences Between Oligopoly and Monopolistic Competition Market Structures
Market structure refers to the interconnected characteristics of a market, which include the number of firms, level and forms of competition and extent of product differentiation (Business Dictionary, 2012). Based on these parameters, several market structures are defined and this essay will focus on two of them, namely monopolistic competition and oligopolistic markets, by discussing the differences among them and their impact on the customers.
Oligopolistic market is defined as a market that is dominated by few large firms, and that these firms are mutually dependent, where they have to monitor the actions of other competitors closely and act accordingly in response to that (Ison and Wall, 2007). These firms target bigger markets, at regional, national and even international level. Examples of oligopolistic markets include airline, petroleum and bank industries (Economics Online, 2012). On the other hand, monopolistic competition market refers to a market with large number of firms, each producing slightly different product, i.e. their products are unique in its own right and hence the firms have a certain degree of monopoly power (Ison and Wall, 2007). In general, these firms target a smaller market size, say at a local or regional level (Economics Online, 2012). For example, restaurants, hair saloons and boutiques are all examples under this market structure.
Firms in oligopoly market have a certain degree of control over the price of their products (Ison and Wall, 2007). However, there is interdependence in price making between the firms. For non-collusive oligopoly, any price making decision will have to take into account the likely reaction of the other firms to ensure market share (Economics Online, 2012). Hence, there is a potential for price war, where the firms try to beat each other by lowering the price, without any increase in demand for their products, as illustrated by the Kinked Demand Curve (Figure 1; Economics Help, 2012). Such circumstance is undesirable as their profits might be diminished and the consumers will be the only beneficiaries. In contrast, in the case of collusive oligopoly, the firms collude among themselves by agreeing on a price of products to avoid price war. Owing to the significant market share they own, they can set the price high to gain supernormal profit (Geoff Riley, 2006).
Figure 1. Kinked demand curve (Economics Help, 2012).
In monopolistic competition, the firms have only little control over the price (Ison and Wall, 2007). This is because the extensive differentiation of products means the firms face constant competition from others, and may easily be replaced if their price is deemed unreasonable, despite certain unique features of their products.
Oligopoly and monopolistic competition market structures also differ in term of profit making. Firms in oligopolistic can make supernormal profit all the time and there are several reasons to this (Ison and Wall, 2007; Amos Web, 2012). Firstly, they own significant market share in a huge market, therefore the sales volume is high. Secondly, average cost of production is low as they produce in bulk. Thirdly, as discussed before, they have the ability to set price, especially in the case of collusive oligopoly (Amos Web, 2012). For instance, Tesco is a chain supermarket that is found everywhere in the UK (hence huge market size) and as they purchase their products from suppliers in bulk, the cost is kept at minimum, thereby maximising their profits (Mearday,...