Monopolistic and Oligopoly Market Structures

Topics: Monopoly, Economics, Perfect competition Pages: 8 (2182 words) Published: August 27, 2011
1.Introduction – Market structures and cases under study

Definition - The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market.

Market structures under study are ones which are more pronounced than others in the real world i.e. ‘Monopolistic competition’ and ‘Oligopoly’.

Very few markets in real world can be classified as perfectly competitive or as a pure monopoly. The vast majority of firms do compete with other firms, often quite aggressively, and yet they are not price takers: they do have some degree of market power. Most markets, therefore, lie between the two extremes of monopoly and perfect competition as seen in in the below picture namely, monopolistic competition and oligopoly.

Monopolistic competition

Fig. 1

Cases under study are – Indian restaurant market in UK (Monopolistic competitive) and AT&T’s wireless service (Oligopoly). Some interesting facts about these 2 cases: Both are perfect examples for studying the behavior of Monopolistic competition & Oligopoly market structures. Telecommunication industry has always been a key contributor towards growth of hi-tech industry in US. (Remember Hi-tech industry alone contributed 20% towards the growth of US economy directly elevating real GDP growth by 1.5 percentage point ). Indian curry has become an integral part of British cuisine, so much so that, since the late 1990s, Chicken Tikka Masala has been referred to as "a true British national dish" . AT&T was a pure monopoly protected by force of law before the breakup of the Bell System in Jan 1, 1984 .

2. A brief note on Monopolistic competition Market structure

Monopolistic competition is nearer to the competitive end of the spectrum. It can best be understood as a situation where there are a lot of firms competing, but where each firm does nevertheless have some degree of market power (hence the term ‘monopolistic’ competition): each firm has some discretion as to what price to charge for its products.

Key characteristics of Monopolistic competition are:
A large number of sellers and buyers: Monopolistic market has a large number of sellers and buyers but each seller acts independently and has no influence on others. Sufficient Knowledge: The buyers have sufficient knowledge about the product to be purchased and have a number of options available to choose from. Differentiated Products

Entry and exit are quite easy and the buyers and sellers are free to enter and exit the market at their own will. Nature of demand curve: each firm produces a product or provides a service that is in some way different from its rivals. As a result, it can raise its price without losing all its customers. Thus its demand curve is downward sloping, albeit relatively elastic given the large number of competitors to whom customers can turn. Economic equilibrium in Short and long run - Profits are maximized at the output where MC = MR. Firms can make considerable short run profits. In the long run as new firms continue to enter equilibrium will be reached when only normal profit remains.

3.A brief note on Oligopoly Market structure

When several firms control a significant share of market sales, the resulting market structure is called an oligopoly. An oligopoly may engage in collusion, either tacit or overt, and thereby exercise market power. An explicit agreement in an oligopoly to affect market price or output is called a cartel. The behavior of firms in oligopoly requires game theoretic analysis.

As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. For example,...
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