Monopolistic Competition and Oligopoly market structures - Essay Example

Monopolistic Competition and Oligopoly market structures Monopolistic competition Monopolistic competition falls under the market structure of imperfect competition where the produces sell differentiated products where the products are not perfect substitutes. In this type of market structure the firm takes the price charged by the competitors as given and does not take into consideration the impact of its price on that of competitors. In the short run the firms operating in monopolistic market can act as monopolies but in the long run the other firms enter into the market and the gains of differentiation takes the downward sloping curve with competition (Cashel-Cordo, n.d, p. 23). Oligopolistic competition Oligopoly is regarded as the market structure where there are large firms operating in the market with significant barriers to entry. The oligopolists are aware of the conditions prevailing in the market as the market is dominated by only few sellers. The decision undertaken by one firm will influence the other firms operating in the market as well as the market as a whole. The decision or the responses of the market participants should be taken into account in the planning process. The prevailing competition in the market structure can give rise different outcomes. An operating firm in the oligopolistic firm can maximise the profit by operating at the level where marginal revenue is same as marginal costs. Differences The primary differences between the two types of market structures are in terms of relative size and control of the market of each firm on the basis of the number of competitors in the existing market structure. It is difficult to find clear cut evidences that cite the differences between the two market structures. Some industries can posses the characteristics of both oligopoly and monopolistic firm. With decrease in the level of competition the firms tend to behave more likely to that of oligopoly and less likely to that of monopolistic competition. The monopolistic market structure offers differentiated products. The suppliers are aware of the price system existing in the market i.e. they are the price makers. The barriers to entry are not stringent in the short run but in the long run the firms can enter or leave the industry. The sellers can act in independent fashion within the market. The demand curve slopes downward and is more elastic than that of monopolists (Economics, 2012). The firms operating in the oligopolistic market structure are interdependent. The products offered can be homogeneous as well as can be differentiated across producers. The interdependence among the firms is correlated with the homogeneity of the products. A huge amount of investment is usually associated with entry in the oligopolistic market. In this market structure the firms can collude and impose some restricted trade practices with the aim to raise prices. The profit of the industry is maximized with the collusion of firms. If one firm believes that the other firm will keep the output level constant it can raise the productivity so as to gain maximum revenue. In a situation characterised by cartel the firms can recognize the significance of joint profits from producing each unit of output. However if one firm believes that the other firm will increase the level of productivity, then the other firm will try to increase the productivity faster to gain the first mover advantage (Central Washington University, 2003, p. 3). In this situation the cartel will broke. The significance of market structures on interests of consumers As long as the consumers are happy in demanding one product regardless of the prices of other products the seller of the product will be acting as a monopolist. But in case of monopolistic competition the happy state is facing the constraint of huge number of products availability. If the firms raise the price of that product the consumer will switch to a different brand of same product line (University of Colorado, 2010, p. 3). The monopolistic firms are always in thoughts to differentiate their products from the competitors. Therefore in monopolistic competition the consumers well being is accruing the benefits of greater product variety. Close substitutes of the products are also available and so the competitive price is useful from the part of the consumers. The figure below will depict the idea better. The area denoted by A is the lost consumers’ surplus while the area B is the lost produces’ surplus. In monopolistic competition the firms do not produce at the minimum point of ATC and they are not interested in equating price and marginal cost. Productive efficiency is not attained if price is greater than minimum point of ATC. In this case the firms are wasting the productive efficiency and in turn affecting the consumers. With price greater than marginal costs the firm is not allocating the products according to the desire of the society (Keppler, 1994, p. 24). The diagram below will depict the behaviour of the firms in oligopolistic competition. At P1, the consumers will like to purchase products from other firms and so they would lose a large share of the market. The loss of revenues will lead to increase in price which will hurt the consumers. If one firm takes the initiative to increase price the other firms will follow and the industry price will rise as a whole. In this type of market structure the firm may engage itself in predatory pricing (Krčílková, n.d, p. 5). In this scenario the already existing firm forces a new entrant out of the business which means the consumers are devoid of competition and the economy is affected. In oligopolistic competition the firms may not compete as well. It depends upon the objectives of the incumbent firm on whether it will compete or not (Solow, 1998, p. 35). Therefore from the above discussion it can be stated that the interests of the consumers are best protected in monopolistic competition. References University of Colorado, 2010. Monopolistic Competition and Oligopoly. [pdf]. Available at: http://www.colorado.edu/Economics/courses/Small/2010_chpt11answers.pdf. [Accessed: 8th March, 2013]. Krčílková, M. n.d. Perfect competition II. Monopolistic competition. [pdf]. Available at: http://pef.czu.cz/~krcilkova/lecture7.pdf. [Accessed:8th March, 2013]. Economics, 2012. “Causes of Monopoly”. [online]. Available at: http://tutor2u.net/economics/content/topics/monopoly/causes_of_monopoly.htm. [Accessed: 8th March, 2013]. Central Washington University, 2003. “Market Structures: Monopoly”. [online]. Available at: https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=11&ved=0CH0QFjAK&url=http%3A%2F%2Fwww.cwu.edu%2F~dhedrick%2FEcon%2520201%2FPowerpoints%2FEcon%2520201%2520Fall%25202003%2520Week%25208b%2520Monopoly.ppt&ei=lryLT4POKZDOrQeeucnNCw&usg=AFQjCNHuJgwfOTaEPt8MySTopwqniL9vkA. [Accessed: 8th March, 2013]. Cashel-Cordo, P. n.d. Krugman Model-Monopolistic Competition. [pdf].Available at: http://business.usi.edu/cashel/341/krugman.pdf. [Accessed: 8th March, 2013]. Solow, R. 1998. Monopolistic competition and macroeconomic theory. Cambridge University Press. UK. Keppler, J. 1994. Monopolistic competition theory: origins, results, and implications. Johns Hopkins University Press.UK. Read More