Question

Question 2: In an oligopolistic market, firms pay close attention to the strategies of their rivals. In monopolistic competition, with a large number of sellers, it is assumed that there is not this kind of rivalry, or interdependence. Why is there probably some rivalry in many monopolistically competitive markets? You also must cover the oligopolistic market.

Answer 1

Monopolistic competition is a market structure characterized by many buyers and sellers and the goods are slightly differentiated but are close substitutes hence the firms invest highly in product differentiation and sales promotion so as to increase their revenue. The rivalry is with respect to the non-price competition which each firm induces by offering sales or discounts or highlight the differentiated services, quality, or features. For instance, Pizza hut and Dominos both sell pizzas but the economic rivalry is based on the non-price competition they induce.

An oligopoly market structure has firms that are highly interdependent hence tend to form cartels so as to maximize profits. There are relatively few sellers and changes in the policy of a firm can drastically affect the market share for the rest of the firms. For instance, if X reduces its price below the going price then it will garner a higher market share hence to avoid that the other firms too will reduce its price but this is not the case when a firm increases its price, as in this situation the other firms will not change their prices. Hence the policy of price and output will depend on the reaction of the rivals.