What is monopoly oligopoly monopolistic competition and perfect competition?

Laundry detergent and bags of ice—products of industries that seem pretty mundane, maybe even boring. Hardly! Both have been the center of clandestine meetings and secret deals worthy of a spy novel. In France, between 1997 and 2004, the top four laundry detergent producers (Proctor & Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market. Officials from the soap firms were meeting secretly, in out-of-the-way, small cafés around Paris. Their goals: Stamp out competition and set prices.

Around the same time, the top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler’s Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market.

If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a monopoly—and enjoy monopoly-size profits. The problem? In many parts of the world, including the European Union and the United States, it is illegal for firms to divide up markets and set prices collaboratively.

These two cases provide examples of markets that are characterized neither as perfect competition nor monopoly. Instead, these firms are competing in market structures that lie between the extremes of monopoly and perfect competition. How do they behave? Why do they exist? We will revisit this case later, to find out what happened.

Chapter Objectives

Introduction to Monopolistic Competition and Oligopoly

In this chapter, you will learn about:

• Monopolistic Competition
• Oligopoly

Perfect competition and monopoly are at opposite ends of the competition spectrum. A perfectly competitive market has many firms selling identical products, who all act as price takers in the face of the competition. If you recall, price takers are firms that have no market power. They simply have to take the market price as given.

Monopoly arises when a single firm sells a product for which there are no close substitutes. Microsoft, for instance, has been considered a monopoly because of its domination of the operating systems market.

What about the vast majority of real world firms and organizations that fall between these extremes, firms that could be described as imperfectly competitive? What determines their behavior? They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would. What will they do?

One type of imperfectly competitive market is called monopolistic competition. Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. Consider, as an example, the Mall of America in Minnesota, the largest shopping mall in the United States. In 2010, the Mall of America had 24 stores that sold women’s “ready-to-wear” clothing (like Ann Taylor and Urban Outfitters), another 50 stores that sold clothing for both men and women (like Banana Republic, J. Crew, and Nordstrom’s), plus 14 more stores that sold women’s specialty clothing (like Motherhood Maternity and Victoria’s Secret). Most of the markets that consumers encounter at the retail level are monopolistically competitive.

The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those dominated by a small number of firms. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which is dominated by Coca-Cola and Pepsi. Oligopolies are characterized by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition.

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Market structure can be defined as the characteristics of a market, which can either be competitive or organizational. Moreover, market structure outlines the nature of the competition and the pricing procedure in a market. Therefore, it describes the number of entities producing similar goods and services in a market, and whose structure is determined by the current competition in the market.

There are four types of economic market structures (organized form the least competitive to the most competitive):

1. monopoly;
2. oligopoly;
3. monopolistic competition; and
4. perfect competition.

A monopoly is a market that consists of a single firm that produces goods that have no close substitutes. Often, this market has many entry barriers. For instance, water providers, natural gas, telecommunications, and electricity are often granted exclusive rights to service.

Characteristics of a Monopoly

• A monopoly is a profit maximizer.
• Monopolies are price makers.
• Price discrimination: monopolies can change both the price and quality of their products.
• There are very high barriers to entry for other firms.
• There is a single seller that controls the whole market.
• Pure monopolies are regulated by the government.

An oligopoly market consists of a small number of relatively large firms that produce similar but slightly different products. Under oligopolies, there also exist some entry barriers with which other enterprises have to contend. Good examples include industries such as oil & gas, airline, and automakers.

Characteristics of an Oligopoly

• Only a few firms operate in the market.
• Profit maximization is a condition in this market.
• Monopolies set their own prices.
• Barriers to entry are high.
• Firms make abnormal profits in the long-run.
• Products may be homogeneous.
• There is a relatively small number of firms supplying the market.

This is an imperfect competition in which several producers sell products that are different from one another. The difference lies in branding or, in most cases, quality. This means that the goods are not perfect substitutes for one another, but they are close substitutes. An example of this can be clothing, where marketing and branding are the main marks of distinction among different but apparently similar black shirts. Another example would be the fast-food industry, where a burger made by McDonald’s is quite similar to a burger made by Burger King from an economic standpoint. Consumers, nevertheless, usually have a preference between the two chains.

Characteristics of Monopolistic Competition

• There are many producers and consumers in the market.
• There is not one firm that has total control over the price of the market.
• Consumers assume that there are non-price differences among the products of competitors.
• Few barriers to entry and exit exist.
• Producers have some control over prices.
• Producers and consumers have no perfect information.

Perfect Competition

Perfect competition refers to a market that has many buyers and sellers, many similar products, and many substitutes. A good example is agriculture, where all rice farmers sell homogeneous products to consumers.

Characteristics of Perfect Competition

• There exist a very large number of buyers.
• There exist a very large number of sellers willing to supply their products at given market prices.
• No single seller or producer is large enough to influence the market price.
• Homogeneous products: the products being sold in this market are perfect substitutes for one another. Their quality and characteristics don’t vary from one another.
• Perfect information: every consumer and producer is aware of the market prices and the utility derived from the use of any of the products.
• There are no entry barriers.

Question

An industry is made up of twenty firms. These firms produce products that easily complement one another and there are no barriers to entry. This industry can be best characterized as:

A. An oligopoly

B. A monopolistic competition.

C. Perfect competition.

Solution

The correct answer is C.

Even though there are only twenty firms in the industry, there are no barriers to entry and the products can easily complement one another (no branding or quality constraints). Firms voluntarily choose not to enter the market.

What is monopoly oligopoly and perfect competition?

A monopoly and an oligopoly are market structures that exist when there is imperfect competition. A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods.

What are the 4 types of competition?

Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly.

What are the 4 types of market structure?

Economic market structures can be grouped into four categories: perfect competition, monopolistic competition, oligopoly, and monopoly. The categories differ because of the following characteristics: The number of producers is many in perfect and monopolistic competition, few in oligopoly, and one in monopoly.

What is monopoly and monopolistic competition?

A monopoly is the type of imperfect competition where a seller or producer captures the majority of the market share due to the lack of substitutes or competitors. A monopolistic competition is a type of imperfect competition where many sellers try to capture the market share by differentiating their products.