Difference between perfect competition monopoly monopolistic competition and oligopoly
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A monopoly and an oligopoly are economic market structures where there is imperfect competition in the market. A monopoly market contains a single firm that produces goods with no close substitute, with significant barriers to entry of other firms. An oligopoly market has a small number of relatively large firms that produce similar but slightly different products. Again, there are significant barriers to entry for other enterprises.
The geographical size of the market can determine whether there is an oligopoly or a monopoly. A firm may dominate an industry in a particular area where there are no alternatives to the same product but have two or three similar companies operating nationwide. Thus, the firm may be a monopoly in a region but operate in an oligopoly market in a larger geographical area.
Pricing and Barriers to Entry
In a monopoly, the seller can charge high prices for the goods because there is no competition. In an oligopoly, the prices are moderate due to the presence of competition. However, they are higher than they would be in perfect competition.
Barriers to entry in a monopoly market are high due to technology, high capital requirement, government regulation, patents and/or high distribution overheads. In an oligopoly market, the barriers to entry are high due to the economies of scale.
Collusion in Oligopolies
A monopoly draws power from the fact that it is the only viable seller of the product in the industry. There are very few true monopolies in the U.S. However, there are oligopolies, and in an oligopoly, firms can influence the market by setting their prices, marketing strategies, and customer service.
In an oligopoly, firms may collude rather than compete. The cooperation makes them operate as though they were one firm. This changes the market structure from being an oligopoly to a monopoly. There must be some measure of competition in an oligopoly market structure.
A prominent example of collusion by an oligopoly occurred in the U.S. publishing market. In 2012, the Department of Justice sued six major book publishers for price-fixing electronic books. In a free market, price fixing, even without judicial intervention, is unsustainable. If one company undermines its competition, others are forced to quickly follow. Firms that lower prices to the point where they are not profitable are unable to remain in business for long.
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The geographical size of the market can determine whether there is an oligopoly or a monopoly. A firm may dominate an industry in a particular area where there are no alternatives to the same product but have two or three similar companies operating nationwide. Thus, the firm may be a monopoly in a region but operate in an oligopoly market in a larger geographical area.
Pricing and Barriers to Entry
In a monopoly, the seller can charge high prices for the goods because there is no competition. In an oligopoly, the prices are moderate due to the presence of competition. However, they are higher than they would be in perfect competition.
Barriers to entry in a monopoly market are high due to technology, high capital requirement, government regulation, patents and/or high distribution overheads. In an oligopoly market, the barriers to entry are high due to the economies of scale.
Collusion in Oligopolies
A monopoly draws power from the fact that it is the only viable seller of the product in the industry. There are very few true monopolies in the U.S. However, there are oligopolies, and in an oligopoly, firms can influence the market by setting their prices, marketing strategies, and customer service.
In an oligopoly, firms may collude rather than compete. The cooperation makes them operate as though they were one firm. This changes the market structure from being an oligopoly to a monopoly. There must be some measure of competition in an oligopoly market structure.
A prominent example of collusion by an oligopoly occurred in the U.S. publishing market. In 2012, the Department of Justice sued six major book publishers for price-fixing electronic books. In a free market, price fixing, even without judicial intervention, is unsustainable. If one company undermines its competition, others are forced to quickly follow. Firms that lower prices to the point where they are not profitable are unable to remain in business for long.
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