Difference Between Oligopoly and Monopolistic Competition

Edited by Diffzy | Updated on: October 28, 2022

       

Difference Between Oligopoly and Monopolistic Competition Difference Between Oligopoly and Monopolistic Competition

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Introduction

Marketers and economists each have their notion of what constitutes a market structure. While economists consider market structure as examining the entire system to analyze and foresee consumer behavior, marketers describe it as devising competitive tactics. The supply and demand of the items on the market are governed by market structure in economics. We purchase things for particular needs, such as a machine from a branded store. According to the market structure, businesses offer their goods to consumers under a monopolistic form of competition, perfect competition, or an oligopoly. Different features are played according to the kind of market structure, the nature of the product, and entrance and exit points. There are many different types of imperfect market competition for various services and goods in a market. There are two of them: oligopoly and monopoly.

On the one hand, a monopoly may be seen in markets with no rivalry, while an oligopoly can be seen in markets with more intense competition. Monopolistic competition is one sort of imperfectly competitive market. monopolistically competitive marketplaces have a lot of rival businesses, yet the goods they sell are not the same. Oligopoly is the second kind of market that lacks complete competition. Oligopolistic marketplaces are those where a limited number of companies dominate.

Oligopoly Vs. Monopolistic Competition

The market structure is how markets are set up based on the number of companies in a sector. The four types of market systems are an oligopoly, perfect competition, monopolistic competition, and monopoly. A monopoly has one company, as the name implies, in contrast to an oligopoly, which consists of fewer relatively big enterprises. Perfect and monopolistic competition both feature a significant number of small firms. The number of market participants distinguishes oligopoly from monopolistic competition—the entry and departure of businesses, price setting, and the firm's relationship with other enterprises. Whether autonomous or dependent, the base of the goods is only a few variations between oligopolies and monopolistic markets.

Oligopoly results from perfect competition, in which things are offered uniformly or differently. Due to the interdependence of the actions of the different companies in an oligopoly market. Restrictions are placed on the entry and departure of enterprises. Oligopoly includes tiny vendors for big businesses. For instance, car manufacturers sell vehicles in either updated or comparable models. A kind of imperfect competition known as monopolistic competition occurs when a large number of businesses provide competitively distinct goods. These businesses independently set certain goods' cost, demand, and supply levels. Under monopolistic competition, companies can enter and go at any time without interference from the government. Furthermore, the monopolistic rivalry is absorbed by many companies, each of which sells a comparable good.

Difference Between Oligopoly and Monopolistic Competition in Tabular Form

Table: Oligopoly Vs. Monopolistic Competition
Parameters Of Comparison
Oligopoly
Monopolistic Competition
Meaning
A market with an oligopoly is one where a limited number of prominent business vendors provide clients with interconnected, homogenous, or differentiated goods.
With several businesses offering the same clients specific or grouped miscellaneous items, monopolistic competition is imperfect.
Number Of Sellers
There aren't many people who sell to big companies.
There are several MC companies, each of which competes with the other companies by selling a separate set of identical items.
Entrance and Exit
Oligopoly businesses may operate as though they are one firm if there are high entry and exit barriers to the market. In addition, government control of access to new enterprises is challenging since the current firm already earn
s an optimum profit.
The monopolistic competition allows for free admission and exit, allowing new entrants and current businesses that have lost money to do so.
Products' nature
The items sold by oligopoly businesses are uniform in size, shape, color, material, and price. However, to compete with other companies, they may also market differentiated items.
Products that are subject to monopolistic competition tend to be heterogeneous or differentiable. For example, businesses sell various sizes, colors, shapes, or goods.
Interdependence
Because so few businesses are offering comparable goods in the market, oligopoly enterprises are very dependent on each other's activities. As a result, one firm's actions affect other companies. In an oligopoly market, establishing pricing may therefore be a reflection of how other businesses are performing.
Companies with the monopolistic competition are autonomous. For example, a single company selling or establishing product prices is a monopoly.
Examples
Large corporations like Mahindra Motors sell homogenous goods in the automotive sector.
Restaurants like Mcdonald's Sell Aloo Tikki Burger in India, but pepperoni patty burger is more popular with American businesses. These are examples of monopolistic competition—Color, form, or cost.
Characteristics
A few big businesses dominate the industry.
These businesses compete based on pricing, customer service, and product differentiation.
The industry is dominated by one company, which gives it the power to determine prices.
Various Power Sources
due to the industry's low number of enterprises, the potential to influence the market. The market may therefore be significantly affected by any company deciding on its pricing or output level.
Because it is essentially the only viable vendor in the market, it has market-making capacity.

What Is Oligopoly?

An oligopoly is characterized by a structure with a smaller number of comparatively more significant enterprises and high entry barriers for new firms. The market is highly concentrated since only a few companies own it. Businesses that operate in an oligopoly market have little competition. As a result, whenever they make a business choice, they must consider their direct competitors' responses. Firms operating in an oligopoly market structure must make important decisions about pricing and competitiveness regarding market strategy. For instance, they must decide if they want to compete with rivals or reach an amicable agreement with them; It also entails choosing whether to raise or lower the price. In addition, they must decide if they should be the first to implement a new strategy or wait for their rivals' actions. The first mover and second mover advantages refer to the benefits of moving first or second, respectively. It is sometimes preferable to take the lead since doing so allows a company to generate enough revenues. Other times, it is preferable to wait and see what the competition has to offer.

A market with an oligopoly is made up of a few relatively big companies that make items that are similar but somewhat different. Oligopolies also have various entrance obstacles that competing businesses must overcome. Industries like oil and gas, aviation, and autos are excellent examples.

Oligopoly characteristics

  • The market is dominated by a limited number of firms.
  • Maximizing profits is a need in this market.
  • Monopolies control the pricing.
  • Entry requirements are strict.
  • Long-term earnings are abnormally high for businesses.
  • Homogeneous products are possible.
  • A relatively limited number of businesses supply the market.

Advantages Of Oligopoly

  1. The existence of an oligopoly in a market or industry indicates the leaders' strong earning potential, which allows them to simplify their operations and develop novel goods. The additional revenue might go toward projects for research and development that would ultimately help their customers enjoy excellence.
  2. In an oligopolistic market, there is little rivalry and little entry of new players. This implies that clients will have fewer options when looking for the most refined product.
  3. Although there will be less rivalry in the oligopoly market, business conduct may be competitive. Due to the companies' competition, consumers might benefit from cheaper pricing and higher quality goods and services.
  4. Prices in an oligopoly market are often higher than in markets with healthy competition. On the other hand, rivals may compare pricing with ease, putting pressure on the businesses. Because of economies of scale, companies have cheap manufacturing costs, lowering prices while making a healthy profit.
  5. Due to the oligopolistic market's lack of rivalry, businesses stand a strong chance of making a significant profit margin. The stockholders benefit from this since they may receive a respectable return on their investment.

Disadvantages Of Monopoly

  1. Few items are created because there is less rivalry in an oligopolistic market. If neither of the things fits the demands of a customer, there are no alternative possibilities. Therefore, customers have fewer options in marketplaces with oligopolies.
  2. Because of the pricing margins, oligopolistic companies frequently profit significantly. Only stockholders and senior management may split the profit. The firm's middle and lower levels can be disregarded to divide the surplus profit they left to compete with one another for what is left.
  3. Businesses cannot make choices on their own and always need to consider the opinions of other industry leaders. In an oligopoly market, the only viable alternative for businesses is to work together rather than compete.
  4. Because larger companies in an oligopolistic economy take up most of the market, small businesses struggle to establish themselves. In addition, entry barriers prevent new companies from entering the market. As a result, there is less competitive competition since new competitors have no threat.
  5. A market with oligopoly discourages innovation by erecting several barriers to entry. Because there is little rivalry and other companies do not provide novel ideas to the market, businesses may be less motivated to innovate.

What Is Monopolistic Competition?

In monopolistic competition, the structure has a lot of little businesses with the flexibility to enter and leave. Each company in this model has several rivals, but each provides somewhat different products. Each business in this group makes judgments regarding the market it serves, the goods it sells, and the associated production costs. An illustration of this is clothes, where marketing and branding fit as the primary markers of differentiation between various but superficially black shirts. Another example is the fast-food business, where from an economic perspective, a hamburger cooked by McDonald's and a hamburger manufactured by Burger King are comparable. However, customers typically choose one of the two businesses over the other.

Monopolistic Competition Characteristics

  • There are several producers and clients on the market.
  • The market's price cannot be fulfilled by a single entity.
  • Customers presume that there are distinctions between rivals' items that go beyond pricing.
  • Entry and exit barriers aren't widespread.
  • Producers can somewhat control prices.
  • Both consumers and producers lack perfect knowledge.

Advantages of Monopolistic Competition

  1. Few Entry Barriers: Few entrance barriers exist in monopolistic competitive markets. The benefit applies to the industry as a whole and the customer's perspective. There will be new competition in the market, which will benefit the sector. Additionally, because there are more accessible manufacturers, customers won't get dependent on fewer items.
  2. Specialized Goods and Services: Customers will be able to choose from a diverse choice of goods and services in a market characterized by monopolistic competition. The number of items is more in a monopolistic competition market than in a monopoly market.
  3. Promote industry innovation: Due to the intense market rivalry, businesses strive to be creative and improve the quality of their product and service offerings. This is advantageous for the sector since innovation will propel it forward.
  4. A Significant Amount of Producers and Sellers: Low entry barriers mean that many sellers and manufacturers will continually enter the market. This is a highly advantageous development for both customers and the sector.
  5. The Consumer Has More Knowledge: In businesses with monopolistic competition, advertising is typically very aggressive. As a result, search expenses are reduced while giving informational consumers a more significant edge. As a result, customers are more informed.

Monopolistic Competition Drawbacks

  1. Individual businesses' reduced production efficiency: A monopoly cannot exist in a market with monopolistic competition. The market is crowded with rival brands. Because of this, it is challenging for businesses to obtain economies of scale. Because there are no economies of scale, a corporation cannot operate at its highest level of manufacturing efficiency.
  2. Product quality is less of a priority than advertising: Businesses concentrate on advertising and promotional efforts to position a product or service as superior to rivals. The emphasis switches from product enhancement to advertising. From the perspective of the consumer, this is a drawback.
  3. More Product Options for Customers: Because so many product options are accessible to consumers, they won't be happy. There will be a lot of comparable items on the market, and clients will be led astray when choosing the right one based on quality expectations.
  4. Mandatory Prices: Companies with significant investment potential might lower prices to eliminate rivals and establish a monopoly. If a company sets its prices low for a sustained period, its competitors won't be able to hold. Predatory pricing is what is meant by this.
  5. Faux Advertisements: Companies will strive to invest more in advertising due to the competition and items that may be substituted. Some advertising may be incorrect and deceptive, exaggerating the quality of the product relative to what it is, which is not ideal from the consumer's perspective.

Main Differences Between Oligopoly and Monopolistic Competition in Points

  • An oligopoly is a market in which a limited number of essential firms provide consumers with identical or differentiated goods. Contrarily, monopolistic competition creates an unfavorable market where many businesses sell similar but distinct things.
  • Monopolistic rivalry is carried by numerous businesses, whereas the oligopoly market contains a few small sellers of massive firms.
  •  Due to the interdependence of the sellers in an oligopoly market, entrance and exit barriers exist. Therefore, enterprises engaged in monopolistic competition are free to enter and depart.
  • Products that are identical in size, price, and color are sold in oligopolies. However, a business with monopolistic competition sells heterogeneous goods that vary significantly in size, form, color, and materials.
  • In an oligopoly market, one business's activities influence the other firm because of its interdependence. On the other hand, monopolistic competition creates a free market where a company may control supply and demand.

Conclusion

Overall, each market structure reflects its distinctive characteristics and has the propensity to vary over time due to changes in geographic location, market size, trends, and desires for a particular product. As a result, understanding each structure is crucial to making effective strategic decisions for a corporation and even a customer. For example, in both markets, businesses gain power by either limiting the supply of their particular goods or services to boost demand or by limiting pricing, affecting how much consumers are required to pay for those goods.


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"Difference Between Oligopoly and Monopolistic Competition." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-oligopoly-and-monopolistic-competition-1080>.



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