MONOPOLISTIC COMPETITION

&
OLIGOPOLY
 THE FOUR MARKET STRUCTURE

1 2 3 4

PERFECT MONOPOLISTIC
MONOPOLY OLIGOPOLY
COMPETITION COMPETITION
MONOPOLISTIC
COMPETITION

• A market structure with a

relatively large number of
vendors selling similar but not
identical goods.

• Monopolistic Competition is a
form of imperfect competition
 CHARACTERISTICES OF MONOPOLISTIC COMPETITION

SLIGHTLY DIFFERENT FREE ENTRY AND EXIT

1 PRODUCTS AND SERVICES
2 FROM THE MARKET
3 MANY COMPANIES

IMPERPECT CONSUMER
5 4 PROFITS
KNOWLEDGE
MONOPOLISTIC COMPETITION

Short Run Profit = (Price – ATC ) x Quantity

MONOPOLISTIC COMPETITION

Short Run Loss = (ATC – Price ) x Quantity

MONOPOLISTIC COMPETITION

Excess Capacity = Quantity Produced at minimum ATC – Quantity yielding the

greatest profit (MR=MC)
 OLIGOPOLY

• Derived from the Greek word

"oligo" (few), "polo" (to sell).

• Market is dominated by a few

large firms or small number of
sellers. The few large firms
compete with each other and
there is an element of
interdependence in terms of
decision making of these firms
 CHARACTERISTICES OF OLIGOPOLY

HOMOGENEOUS OR
1 FEW NUMBER OF FIRMS 2 DIFFERENTITATED 3 BARRIERS TO ENTRY
OR FEW SELLERS PRODUCT

5 UNCERTAINTY 4 INTERDEPENDENCE
 TYPES OF OLIGOPOLY 6

3 CLOSED
OPEN OLIGOPOLY
OLIGOPOLY
2
Provides full freedom to
Only few firms control the
NON-COLLUSIVE new firms to enter industry
1 market and new firms are
OLIGOPOLY not allowed to enter
COLLUSIVE industry.
OLIGOPOLY If firms in an oligopoly
IMPERFECT OR
market compete with each
PURE OR PERFECT DIFFERENTIATED If the firms cooperate with other
OLIGOPOLY OLIGOPOLY each other in determining
price or output or both.
If the firms in an oligopoly If the firms produced
market manufacture differentiated products.
homogeneous products
THE KINKED DEMAND CURVE

• The kinked demand curve was developed by

American economist Paul Sweezy and has
become crucial in oligopoly theory. It
illustrates the interdependent behavior of
firms in oligopolistic market structures

• A business is an oligopoly when faces a

downward sloping demand curve, but the
price elasticity of demand may depend on the
likely reaction of rivals to changes in one's
firms' price and output.
 Characteristics of Kinked Demand Curve

1 2 3 4

Few Firms Dominate High Barriers to Non-Price

Interdependence
the Market exit and entry Competition
Assumptions and Limitations of the Kinked Demand Curve

There is an initial price in the market, but there is no explanation as to why this price was set

Rival firms will not follow an attempt to increase their prices but will react when a rival firm decreases
theirs.

In theory, it isn’t rational for firms to increase or decrease prices, but in the real world, firms still decrease
prices to gain consumers and increase market share.

It doesn’t explain the mechanism of establishing the kink in the demand curve

Doesn’t include the possibility of firms colluding within the market

THANK YOU
REFERENCES

https://www.studysmarter.us/explanations/microeconomics/imperfect-competition/the-kinked-
demand-curve/
https://thismatter.com/economics/monopolistic-competition-prices-output-profits.htm

https://www.indeed.com/career-advice/career-development/monopolistic-competition

https://kstatelibraries.pressbooks.pub/economicsoffoodandag/chapter/__unknown__-5/

https://onlinelibrary.wiley.com/doi/abs/10.1002/9781118785317.weom080072