OLIGOPOLY AND MONOPOLISTIC COMPETITION:

Oligopoly and monopolistic competition have some similarities, but also have a few important differences. Both are examples of imperfect competition on the market structure continuum between ideals of perfect competition and monopoly. However, oligopoly contains a small number of large firms and monopolistic competition contains a large number of small firms. The dividing line between oligopoly and monopolistic competition can be blurred due to the number of firms in the industry. Oligopoly is a market structure containing a small number of relatively largefirms, with significant barriers to entry of other firms. Monopolistic competition is a market structure containing a large number of relatively small firms, with relative freedom of entry and exit. While it might seem as though the difference between oligopoly and monopolistic competition is clear cut, such is not always the case. A comparison between these two market structures is offers a little insight into each. Many or Few: The primary difference between oligopoly and monopolistic competition is the relative size and the market controlof each firm based on the number of competitors in the market. However, there is no clear-cut dividing line between these two market structures. It is not possible to say that some number like 50 firms is the dividing line, such that 50 firms make it an oligopoly and 51 make it monopolistic competition. While one industry containing only 3 firms is clearly oligopoly and another industry with 30,000 firms is undoubtedly monopolistic competition, the structure of an industry with 30 firms or 300 firms is not as obvious. Such industries might have characteristics of both oligopoly and monopolistic competition. As the number of firms decreases, the firms tend to behave more like oligopoly and less like monopolistic competition.

Dominance by a Few: In some cases status depends more on the dominance of a few firms rather than the total number of firms in the industry. An industry with 3,000 relatively equal firms is most assuredly monopolistic competition. However, an industry with 3,000 firms, that is dominated by 3 relatively large firms, is most likely oligopoly. For example, the petroleum extraction industry has thousands of firms, but a handful of the largest firms dominate the market, making it an oligopoly.

Geographic Area: In other cases, the geographic size of the market is the prime determinant of market structure. A particular industry might be monopolistic competition in a large city, but oligopoly in a smaller town. Retail sales offer an example. Larger cities usually have hundreds, even thousands, of shopping

alternatives, including discount super centers, mom-and-pop stores, shopping malls, and nation-wide chains. Such a market is monopolistic competition. Smaller towns, however, tend to have fewer stores, perhaps a single super center or shopping mall and a handful of stores located in a small downtown area. Such a market is oligopoly.

Barriers to Entry: A key difference between oligopoly and monopolistic competition is barriers to entry. Oligopoly barriers are high. Monopolistic competition barriers are low. However, entry barriers are a matter of degree. The need for governmentauthorization is one entry barrier that can create oligopoly, especially if entry is limited to only a few firms. However, it can also create monopolistic competition if a larger number are allowed entry. Other barriers, such as start-up cost and resource ownership, also limit entry to different degrees, leading to either oligopoly or monopolistic competition. Moreover, these entry barriers can change over time, transforming oligopoly into monopolistic competition or vice versa.

Oligopoly and monopoly have some similarities, both tend to be relatively large and possess significant market control, but also have a few important differences, oligopoly market has more than one firm. The dividing line between oligopoly and monopoly, however, can be blurred due to the closeness of substitutes and the inclination of oligopoly firms to collude. Oligopoly is a market structure containing a small number of relatively largefirms that often produce slightly differentiated output and with significantbarriers to entry. Monopoly is a market structure containing a single firm that produces a good with no close substitutes and with significant barriers to entry. While it might seem as though the difference between oligopoly and monopoly is clear cut, such is not always the case. A comparison between these two market structures is bound to be illuminating. One or Few: The primary difference between oligopoly and monopoly is that monopoly contains a single seller, whereas oligopoly has two or more sellers. Such a difference might seem to provide a clear separation. But not necessarily.

Substitutes: In some cases, the difference between oligopoly and monopoly is blurred by the closeness of substitutes. A monopoly produces a good with NO close substitutes. An oligopoly firms produces a good with a small number of relatively close substitutes. However, the oligopoly-monopoly difference is blurred if an oligopoly firm pursues product differentiation to such an extent that it creates a product with no close substitutes. As such, the oligopoly moves closer to monopoly. For example, Microsoft was once one of several oligopoly software companies. However, continued modification and enhancements of its software increasingly reduced the degree of substitutability with other software, moving it closer to monopoly status. Alternatively, changes in the goods produced by other firms can make the good produced by a monopoly good more of a substitute. As such, the monopoly firm becomes more of an oligopoly. For example, AT&T once held a nationwide monopoly

on telephone services. Technological advances, such as cellular telephones, allowed other firms to offer increasingly close substitutes, moving AT&T to oligopoly status.

Cooperation: The dividing line is also blurred between oligopoly and monopoly due to cooperation and collusion. The small number of large firms in oligopoly creates an opportunity and an incentive to cooperate rather than compete. Doing so can effectively transform an oligopoly industry into a monopoly. The industry might contain more than one firm, but those firms act as one.