Oligopoly v. monopolistic competition

Ms. Murren
Outcome: SWBAT compare oligopolies and
monopolistic competition
Initial Activity
Monopolistic Competition
Mini Lesson
 What is an Oligopoly?
 An oligopoly exists when an industry is dominated by a few
suppliers that exercise some control over price
Oligopolies are not as harmful as monopolies. The
consumer may pay higher prices than in a perfectly
competitive market but prices are stable and they offer a
wider variety of products than a perfectly competitive
Mini Lesson
Characteristics of an oligopoly
 Domination by a few sellers
 Several large firms are responsible for
70% - 80% of the market
 Barriers to entry
 Capital costs are high and it is difficult
for new companies to enter major
 Identical or slightly different
 Goods/Services provided by oligopolies
are very similar
 Non price competition
 Advertising emphasizes minor
differences and attempts to build
customer loyalty (product differentiation)
 Interdependence
 Any change on the part of one firm will
cause a reaction on the part of other
firms in the oligopoly
Interdependence and Price Wars
 With so few firms in an oligopoly, whatever one does the
others are sure to follow. When one domestic airline cuts
fares to gain market share the other major domestic
airlines lowers theirs even more. Although this type of
price war is initially good for consumers it may force an
airline out of business if prices drop too much. Fewer
airlines, means less competition which may raise prices
in the long run
Cartel and Collusion
 What is collusion?
 When competing firms in an oligopoly secretly agree to
raise prices or divide the market, they are performing an
illegal act called collusion. Heavy penalties such as fines
and imprisonment are levied against companies found guilty
of collusion.
 What is a cartel?
 An arrangement groups of industrial businesses to reduce
international competition by controlling price, production
and distribution of goods.
Monopolistic Competition
What is monopolistic competition?
A market situation in which a large
number sellers offer similar but slightly
different products and in which each
has some control over price
Characteristics of Monopolistic Competition
 Numerous Sellers
 No single seller or small group
dominates the market
 Relatively easy entry
 Entry into the market is easier than in a
monopoly or oligopoly. One draw back is
the high cost of advertising
 Differentiated Products
 Each supplier sells a slightly different
product to attract customers
 Businesses compete by using product to
attract customers
 Non-price Competition
 Some control over price
 By building a loyal customer base
through product differentiation, each
firm has some control over price