Market Structures
Monopolistic Competition and
Oligopoly
Monopolistic Competition
 Many companies compete in an open
market to sell products that are similar but
not identical.
 Each firm holds a monopoly over its own
particular product.
 Modified version of perfect competition
with minor differences in products
Monopolistic Competition
 Goods are similar enough to be
substituted for one another but they’re not
identical.
 Does not involve identical commodities
 Examples:
 Bagel shops, ice cream shops, gas stations,
fast food restaurants
Four Conditions of Monopolistic
Competition
1. Many firms
2. Few artificial barriers to entry into the
market
3. Slight control over price
4. Differentiated products
Four Conditions of Monopolistic
Competition
 Differentiation enables a monopolistically
competitive seller to profit from the
differences between his or her products
and competitors’ products.
Nonprice Competition
 Competition through other ways other
1.
2.
3.
4.
than lower prices.
Physical characteristics – a new size,
color, shape, texture or taste
Location – “location, location, location”
Service level – fast food v. casual dining
restaurants
Advertising, image, or status
Price, Output, and Profits
 Prices are higher but not as high as in a
true monopoly
 Output and price are negatively related.
 Falls somewhere between monopoly and
perfect competition
 Earn just enough profit to cover all of their
costs.
Oligopoly
 Describes a market dominated by a few
large, profitable firms.
 Looks like an imperfect form of monopoly
 If the four largest firms produce 70 to 80
percent of the output.
Oligopoly
Barriers to Entry
 Government licenses or patents
 High start-up costs
 Economies of scale
 Image and brand name
Oligopoly
Many government regulations try to make
oligopolistic firms act more like competitive
firms.
 Three practices that concern
government:
1. Price leadership
2. Collusion
3. Cartels
Oligopoly
 Price leaders can set prices and output for
an entire industry (if others go along)
 Collusion is an agreement among
members of an oligopoly to set prices and
output level – sets prices like a monopoly
 A Cartel an agreement by a formal
organization of producers to coordination
prices and production. – illegal in the U.S.