Monopolistic Competition and Oligopoly

There are so many reasons why price wars can happen in an oligopoly market structure. Some of the reasons are due to

Oligopoly is a market structure in which a few firms dominate the market (Jocelyn Blink & Ian Dorton, 2012). The market may have a large number of firms or just a few, but the important idea is that the industry’s output is shared by a small number of firms. It is possible for oligopolistic industries to differ, in the sense that some industries would produce the same kind of products, where the product is practically the same and only the companies name is different. On the other hand, there are also industries that produce completely different product and also ones that produce products that are only a bit different from each other, but these firms do tend to spend most of their budgets to advertise their products (Jocelyn Blink & Ian Dorton, 2012). There are a few main characterises of firms that operate as oligopolies these include:

12 (TCO 3) Identify the primary characteristics of monopolistic competition and oligopoly. Give examples of each.

2. (Price Leadership) why might a price–leadership model of oligopoly not be an effective means of collusion in an oligopoly?

The main characteristics of a competitive market are that there are buyers and sellers and it is easy to come in and out the market. The goods offered by the various sellers are the same.

The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits.

There are different types of market situation a firm has to face which directly affect the price and the quantity demanded and supplied in the economy. The major types of market structures prevalent in the economy are perfect competition, monopolistic market, monopoly, oligopoly and duopoly. Here, in this essay we will be elaborating about three market conditions i.e. monopoly, oligopoly and duopoly where monopoly is characterized by single seller in the market selling unique products with high barriers to entry which makes it difficult or impossible for others firms to enter the market. As a result, firm can enjoy abnormal profit by owning the fundamental resources, licenses and patents that create legal barriers to other

The industry is not in a state of perfect competition, because the products and the branding are forms of differentiation. There are too many firms for this to be either an oligopoly or monopoly form (Riley, 2012)

Interdependence – Since the No. of Firms are few, so the action taken by one firm would definitely affect the other firms as well. A change in price can evoke reaction from other firms.

The theory of pure competition is a theory that is built on four assumptions: (1.)There are many sellers and many buyers, none of which is large in relation to total sales or purchases. (2.) Each firm produces and sells a homogeneous product. (3.) Buyers and sellers have all relevant information about prices, product quality, sources of supply, and so forth. (4.) Firms have easy entry and exit.

A monopoly has certain characteristics, namely being the sole provider in the market, enjoying abnormal profits, having freedom to control prices, being protected by high entry barriers, and having no close substitutes (unknown, 2012).

In an oligopoly market, prices are stable. This is because firms within this market fear a price war occurring. When it comes to lowering or increasing price, oligopoly firms will consider the likelihood of competing firms doing the same thing, in order to avoid triggering a price war.

7) Elements of monopoly :- There exist some elements of monopoly under oligopolistic situation. Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. In such a case it acts in its sphere as a monopolist in lining price and output.

It is quite challenging to know about oligopoly by looking at the market structure of an industry. Sometimes the industry may have some of its subtypes but it may not use it for the profit. For instance, US may have hundreds of airlines but its not necessary that the entire airline in US for the same destination are competing with each other. There could only be one or two major airlines that may compete with each other like American and United.

The competitive equilibrium emphasizes that a perfect competition has four common characteristics. The first characteristic of a perfection competition is when a large number of firms produces goods or service for a market that has a large amount of consumer. The second characteristic of a perfect competition is that there are no barriers for new firms to enter the markets at any time. The third characteristic of a perfect competition is all of the firms in the market sell produces that are identical in nature. The fourth characteristic of perfect competition is that all firms and consumers are price takers (). This means that the firms will have product for sale at a certain price, and the consumer will have no problem purchasing the product at that price. Consumers do not influence the prices at all in a perfect competition.