Question

Most markets do not have a single monopolist nor a large number of firms to make for perfect competition. Explain the similarities and differences between monopolistically competitive markets and oligopolistic markets.

Answer 1

The similarities between oligopoly and monopoly competition are:

• They both exhibit imperfect competition in that oligopoly has few sellers while monopoly has many sellers.
• Firms have some level of control over prices in both competitive structures.

The major differences between the two include:

• In monopolistic competitive structures the products and services are highly differentiated as compared to oligopoly competitive structures.
• In oligopoly competition, the market is dominated by a few large entities while in a monopoly competition the market comprises many small entities. For example the wireless communication industry in the U.S. has a number of entities but only a few dominate the market exhibiting an oligopoly competitive structure.
• In oligopoly competition, there are higher barriers to entry while in monopolistic competition the market offers some freedom to entry or exit. For example, in an oligopoly, the barrier to entry may be presented through the government where policies are enacted to limit the number of entities in that particular industry.

• There are both similarities and differences between these two market structures.

  The most obvious difference is in the number of firms involved. In an oligopoly only a few firms are in the market. By contrast, many small firms are involved in monopolistic competition. An oligopoly is generally considered to consist of between two and twenty firms. The lower number is set, but the higher number is not -- there is no firm number of firms that separates oligopoly from monopolistic competition.

  Another major difference is that firms in oligopolies affect one another. Price changes (for example) by one firm will affect the choices of other firms. This is not the case in monopolistic competiton.

  The main similarity is in the kinds of products firms in these two market structures produce. In both, the firms can be producing differentiated products (although some oligopolies are producing homogeneous products).