Question

2. What is the difference between monopolistic competition and oligopoly?

Answer 1

Answer.) Monopolistic Competition
Monopolistic competition is a situation in which the market, basically, is a competitive market but has some elements of a monopoly. In this form of market there are many firms that sell closely differentiated products. The examples of this form of market are Mobiles, Cosmetics, Detergents, Toothpastes etc.

Features
1. Large number of buyers and sellers :- In this form of market, while the buyers are as large as it is under perfect competition or monopoly, the number of sellers is not as large as that under perfect competition. Therefore, each firm has the ability to alter or influence the price of the product it sells to some extent.

2. Product Differentiation:- Under Monopolistic Competition products are differentiated. This means that the product is same, brands sold by different firms differ in terms of packaging, size, color, color features etc. For example-soaps, toothpaste, mobile instruments etc. The importance of Product Differentiations is to create an image in the minds of the buyers that the product sold by one seller is different from that sold by another seller. Products are very similar to each other, but not identical. This allows substitution of the product of one firm with that of another. Due to a large number of substitutes being available Demand for a firm’s product is relatively elastic.

3. Selling Costs:- As the products are close substitutes of each other, they are needed to be differentiate for this firms incurs selling cost in making advertisements, sale promotions, warranties, customer services, packaging, colors are brand creation.

4. Free Entry and Exit of firm:- Like perfect competition, free entry and exit of firms is possible under this market
form. Since there are no barriers to entry and exit, firms operating under Monopolistic Competition, in the long run, earn only normal profits.

Oligopoly
The term Oligopoly means ‘Few Sellers’. An Oligopoly is an industry composed of only few firms, or a small number of large firms producing bulk of its output. Since, the industry comprises only a few firms, or a few large firms, any change in Price and Output by an individual firm is likely to influence the profits and output of the rival
firms. Major Soft Drink firms, Airlines and Milk firms can be cited as an example of Oligopoly.

Features
1. A Few Firms :- Oligopoly as an industry is composed of few firms, or a few large firms controlling bulk of its output.

2. Firms are Mutually Dependent:- Each firm in oligopoly market carefully considers how its actions will affect its
rivals and how its rivals are likely to react. This makes the firms mutually dependent on each other for taking price and output decisions.

3. Barriers to the Entry of Firms:- The main cause of a limited number of firms in oligopoly is the barriers to the entry of firms. One barrier is that a new firm may require huge capital to enter the industry. Patent rights are another barrier.

4. Non Price Competition:- When there are only a few firms, they are normally afraid of competing with each other by lowering the prices; it may start a Price War and the firm who starts the price war was may ultimately loose. To avoid price war, the firm uses other ways of competition like: Customer Care, Advertising, Free Gifts etc. Such a
competition is called non-price competition.