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Oligopoly and Monopolistic Competition

The market is not a constant structure, but an ever-changing and complex construct. The well-known ideals of monopolistic and competitive markets are not as widely applicable as they would seem at first glance. Monopolistic competition and oligopoly are examples of mixed market systems. In terms of output and pricing, they are located between monopoly and perfect competition. This essay presents their definitions and compares them to the perfect competition model.

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There are several conditions and factors that define oligopoly and monopolistic competition. The number of firms that enter the market is the most important defining condition, as this number dilutes the monopolistic pricing toward the product’s marginal cost (Mankiw, 2018). The marketing product between firms in these settings is similar. Although it could be identical in an oligopoly, it stays partially unique in monopolistic competition. Firms from these market systems compete for the same customers. Both models, unlike the perfect competition model, allow firms to have an influence on the price.

The monopolistic competition model allows firms to act as a monopoly to a certain degree. However, as Mankiw (2018) states, in the long run, “when firms are making profits, new firms have an incentive to enter the market” (p. 323). The demand curve in this model is downward-sloping, while in the perfect competition model the demand curve is horizontal. This leads to a self-balancing system, where the more firms enter the market, the less the demand will be, and the more firms will have an incentive to exit the market (Mankiw, 2018). The freedom of entry and exit to the market leads to production levels kept at a minimum of the average total cost (Mankiw, 2018). Since the product price is not equal to its marginal cost as in the perfect competition, firms are encouraged to attract customers.

An oligopoly occurs in a market that has a small number of firms covering the majority of that market’s demand. It is defined by a high concentration ratio, which drives the largest firms to be wary of each other’s actions and reactions. Mankiw (2018) states that “a small number of sellers makes rigorous competition less likely and strategic interactions among them vitally important” (p. 321). This approach is defined by a mix of cooperation and self-interest, which are often unbalanced. Nowadays, in order to gain higher ground and a bigger share, oligopolistic firms tend to develop technologies that could potentially turn the market into monopolistic (Ganapati, 2018). In an oligopoly, firms tend to increase production until output and price effects are balanced out.

The product output in this model is less than under the perfect competition model due to profit-driven monopolistic tendencies. As fewer firms are involved in the market, the price gets higher. The prisoner’s dilemma guarantees that all competitors would not set the output or prices close to monopoly parameters due to fear of other companies cheating them by producing more (Mankiw, 2018). In this state of cautious interaction and thorough examination of market influences, firms achieve a lesser outcome and lower profits.

These two market models are more natural in modern economics, as the market is easier to enter. The number of firms on the market depends on the product, and, as Mankiw (2018) argues, “it is hard to decide what structure best describes a market” because “the reality is never as clear-cut as theory” (p. 322). In conclusion, these models allow economists to give an evaluation of a market, but cannot be used as a constant, and markets tend to fluctuate between them.

References

Ganapati, S. (2018). Growing oligopolies, prices, output, and productivity. [Master’s Thesis, Georgetown University]. Web.

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Mankiw, G.N. (2018). Principles of economics (8th ed.). Cengage Learning.

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