Differences between Oligopolistic and Monopolistic Markets - Essay Example

Oligopoly and Monopoly: Comparison and Analysis There are a number of differences which appear between oligopolistic and monopolistic markets. The most common ones are as follows. Oligopolistic markets have fewer players than the monopolistic markets. In an oligopoly, there are either extremely few players in the market, or the market could have many players, but only remarkably few dominate the market (Gitman and McDaniel, 2008, p.25). This is unlike the monopolistic market where there are many players in the market. In a monopolistic market, while one or a few players may be able to dominate the market, they can only do so for a short time until the other players are too powerful for them to continue with the dominance. Monopolies operate in an imperfect competition, which is where one or a few players in the industry have immense control over the prices of the products in the market. Barriers to entry Another differentiating factor between monopolistic markets and oligopolistic markets is the barriers to entry. In an oligopolistic market, there are many barriers to entry and this makes it harder for new entrants in the market. Monopolistic markets however don’t have any permanent barriers to entry and therefore new entrants are able to eventually capture the market and compete with the existing players. This leads to the next difference between the oligopolistic markets and monopolistic markets, which is abnormal profits. Fig 1.0 showing the change of profits with time in a monopolistic market Abnormal profits Firms in oligopolistic markets are able to make abnormal profits in the short run as well as the long run. They are able to make abnormal profits because the market is not affected by the natural forces of demand and supply and they can therefore sell their products at the prices they choose. In the long run, they are still able to make abnormal profits because there are no new entrants, due to the barriers of entry. This is one thing that differentiates oligopoly from monopoly because while firms in a monopolistic market are able to make abnormal profits in the short run, they are unable to make these profits in the long run because new entrants will have penetrated the market and competition will have changed. In the long run, firms in a monopolistic market have to adjust to the forces of demand and supply in order to deal with the competition. As more firms enter into a monopolistic market, the competition starts to move towards perfection and firms in the market have to respond to the forces of demand and supply. Control of prices In an oligopolistic market, firms control the prices without regard to what the consumers think (Puu, 2002, p.1). This is unlike the monopolistic market where the firms base their prices on the customers demand. The fact that firms in oligopolistic markets don’t have to deal with demand and supply forces means that they can collude with each other to fix prices of their products. This is why they are able to make abnormal profits, unlike firms in monopolistic markets which have to take care of demand and supply forces at some point. In an oligopolistic market, players are concerned about each other, not the customer, and this means such issues as setting the prices are done as an agreement between the firms. Fig 1.1 showing the effect of price on quantity in an oligopolistic market Implication of oligopolistic and monopolists markets to the consumers From a theoretical point of view, a monopolistic market is more advantageous to consumers than the oligopolistic market. This is because of two principal reasons. The first reason is about the pricing of the products. Oligopolies don’t have any competition, and they can create a memorandum of understanding between them that allow them to set high prices for their products so as to take advantage of the market as much as possible. Oligopolistic markets give the firms in the market too much power over the consumers, and consumers can only take what firms set as the price for their products. This is why firms in such a market are able to make abnormal profits both in the short run as well as the long run. The other issue with regard to oligopolistic markets is that innovation and quality improvements are not encouraged (Anderson, 1977, p.109). Firms in these markets do not feel the pressure to increase quality. Firms in oligopolistic markets are also not willing to invest in research and development because that would cost them money. Conversely, in a monopoly market, firms will be willing to perk up the quality of their products because they know that if they don’t do this, new market entrants will do that, and they will lose the market share. Even in cases where monopoly hinders innovation, in the long run, firms in monopolistic markets have to review the value of their services else they will lose the market. In this regard, consumers can benefit more from monopolistic market because they will get better quality products, as opposed to how the situation would be if the market was a monopolistic one. There is however a number of issues to consider while judging how these two kinds of market affect the consumers. In the first place, monopolistic markets don’t always lead to better market competition in the future especially where some factors are considered such as the difference in quality of goods, customers’ willingness to buy low quality products at lower prices, etc. At the same time, even oligopolistic markets can still be able to improve quality and use innovation, in exceptional cases such as where the government interferes with their operations through policies (George and Harbury, 1992, p.179). According to Nishimura (1995, p.4), the theory about perfect competition is always different from the practical model, and in this case, it is harder to draw a perfect view of how any kind of market affects the consumers. Conclusion Monopolistic markets leave space for new entrants while oligopoly creates barriers for entry of new firms. In this regard, firms in a monopolistic market will eventually have to deal with new competition and cannot enjoy enormous profits in the future. Oligopolistic markets however, despite that they don’t face competition from the market, may achieve a perfect competition as they compete with each other. However, this is difficult in theory because the firms prefer not to compete, but work together to get the highest profits from the market. Reference List: Anderson, D. (1977). Economics. New Delhi: Pearson Education India. George, & Harbury. (1992). First Principles of Economics. Oxford : Oxford University Press. Gitman & McDaniel. (2008). The Future of Business: The Essentials. London: Cengage Learning. Nishimura, K. (1995). Imperfect Competition, Differential Information, and Microfoundations of Macroeconomics. Oxford : Oxford University Press. Puu, T.(2002). Oligopoly Dynamics: Models and Tools. New York City, NY: Springer. Read More