Market
Monopoly, Monopolistic Competition, Oligopoly
Market Structures
• Perfect Competition is a market structure which has many buyers and many sellers selling identical
products. No impact on the market price, firms are price takers
• Monopoly is a market structure in which there is only one producer/seller for a product. Therefore,
monopolies are price makers
• Monopolistic Competition is a market structure with many sellers; it occurs often in the real world
selling differentiated products.
• Oligopoly is a market structure where only a few firms make up an industry. These firms have control
over the product's price
Monopoly
• Only one seller/Single Seller of a particular product
• No close substitutes for the commodity
• There are barriers to entry.
• Monopolist as they can sell same quantity of output at different prices or different quantity of output at
the same price. Thus, there is no one to one correspondence between price and quantity sold by a
monopolist. Hence, there is no supply curve of a monopolist
• The profit of a monopolist is maximized at a point where MR = MC
• Price Discrimination – If a monopolist sell his/her output at different prices at different market, it is
known as price discrimination.
Causes of Monopoly
• Ownership of strategic raw materials, or exclusive knowledge of production techniques.
• Patent rights for a product or for a production process.
• Government licensing or the imposition of foreign trade barriers to exclude foreign competitors.
• The size of the market may be such as not to support more than one plant of optimal size.
Types of Monopoly
There are four broad categories of monopoly:
• Natural - It is financially impractical, if not impossible, for multiple companies to engage in the
business. For example, if you had multiple companies attempting to offer electricity, that would require
multiple power lines running to homes which is impractical and probably spatially impossible.
• Geographic - Only one company offers a particular good or service in an area. For example, in a small
town there may only one general store, which has a monopoly on the goods it sells.
• Technological - A good or service a company provides has legal protection in the form of a patent or
copyright.
• Government - Government sometimes reserve a specific trade, product or service for public agencies.
For example, many times a government agency will be in charge of water. Legal barriers are put up to
prevent other companies from competing in those areas.
Monopolistic Competition
• Lots of buyers and sellers who are well informed, but products are slightly different.
• Monopolistic competitors use non-price competition - Advertising, giveaways, or other promotions
Four conditions of Monopolistic Competition
• Monopolistic competition – many sellers and many buyers selling differentiated products
• Few Artificial Barriers to Entry – Barriers to entry are relatively low
• Slight Control over Price - Firms have some freedom to raise prices because each firm’s goods are a
little different from everyone else’s
• Differentiated Products - Firms have some control over selling price because they can differentiate, or
distinguish, their products from other products in the market.
How do Firms in Monopolistic Competition get customers?
• Through Nonprice Competition: a way to attract customers through style, service or location, but not
a lower price.
Four types of Nonprice Competition
• Characteristics of Goods - Firms distinguish products through size, color, shape, texture or taste
• Location of Sale - A convenience store in the middle of the desert differentiates by selling it miles from
competitors
• Service Level - Some sellers can charge higher prices because they offer customers a higher level of
service; Ex. Fancy sit-down restaurant vs. McDonalds
• Advertising Image - Advertising creates apparent differences between products in the marketplace.
Ex. Prada vs. Vogue Sunglasses
Monopolistic vs. Perfect Competition
Perfect Competition Monopolistic Competition
Prices Lower, firms have no control Higher, firms have some control
Profits Lower Higher in short term, but must
work hard to keep ahead of rivals
Cost and Variety Low costs, no variety (identical Higher costs for differentiation,
products) wide variety
Oligopoly
• An oligopoly is a market characterized by a small number of firms who realize they are interdependent
in their pricing and output policies. The number of firms is small enough to give each firm some market
power.
Features of Oligopoly
A Few Firms with Large Market Share.
High Barriers to Entry.
Interdependence.
Each Firm Has Little Market Power In Its Own Right.
• Higher Prices than Perfect Competition.
Non collusive Oligopoly
Non-collusive oligopoly refers to the situation where the firms compete with each other and follow their
own price and quantity and output policy independent of its rival firms. Every firm tries to increase its
market share through competition.
Collusive Oligopoly
Collusive Oligopoly can be defined as the form of oligopoly wherein the sellers eliminate competition by
way of a formal or informal agreement. As against, a non-collusive oligopoly is one in which each firm
sets its own price and level of output and compete in the market.
