Monopoly Firm, Monopolistic Competition and Oligopoly in Detail
In the case of imperfect competition, a market structure is required, which comes in the form of monopoly and oligopoly. The sheer geographical size of the market can determine which structure exists. A particular company could control the industry in a specific area with no other alternatives, whereas other similar companies could choose to operate in other countries. This is the main difference between monopoly and oligopoly. Let us delve deeper into the three main market structures: monopoly, oligopoly, and monopolistic competition.
What is a Monopoly?
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Monopoly typically refers to a single company producing a product or providing service with no other substitute. This means that this company acts as a dominant force in its offerings. With enough power to ensure that other substituting establishments or institutions do not come close to their price points, services, and brand quality. Such companies stand as a force to reckon within the market structure. Monopolies usually exist to provide ultimate benefits to the consumer and often possess information that no other companies have.
What is Oligopoly?
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In such type of a market structure, a cluster of companies, which can range from two or more, control the demand in the market. This means that unlike in a monopoly, where only one company is the godfather, different establishments sell similar products to cater to the consumer in an oligopoly. The price points in such a market are often reasonable due to the competition, and the costings are often similar to the companies feed off of each others’ offerings to stay within that price range. More often than not, companies tend to collude with their competitors instead of competing with them to ensure that an overall balance in the business remains.
Difference Between Monopoly and Oligopoly with Examples
Let us have a look at an example of monopoly oligopoly with relevant examples;
Example of Monopoly:
The country's primary monopolies are government-run such as the Indian Railways (IR) – Lifeline of the nation. Due to the operation at minuscule economic scales, there is no room for another aspiring company to even begin to compete with IR. Not only that, additional restrictions issued by the government of India further prevent aspiring companies to even attempt to compete. This is a classic example of a monopoly.
Did you know? Your favourite fast-food chain McDonald's is an example of a monopoly and the monopolistic competition in market structure.
Example of Oligopoly:
With a few powerful companies dominating smaller entrants, classic examples of oligopoly are airlines. Two of the top airlines, namely IndiGo and Air India, have taken over the airway world with their impeccable price points and services but offering similar benefits. They have the largest market shares and can often merge their services and prices to offer similar advantages for the consumers without wiping each other out, trying to outshine one another.
Did you know? Popular soda companies Coca-cola and Pepsi are examples of oligopoly.
Monopolistic Competition
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A market structure that combines the factors of monopoly, as well as other competitive markets, is termed as monopolistic competition. This type of market structure gives the freedom of entering as well as exiting at their convenience. This factor alone offers a malleable demand curve, allowing it to set its prices. However, this advantage can also lure more institutions to enter the market with the prospect of making higher profits. A few of the key features of monopolistic competition are:
The entry of several firms.
Complete freedom to enter and exit.
Different companies offer different products.
An inelastic demand resulting in curating comfortable price points.
Normal profits can be achieved in the long term goal.
Companies involved in such a market structure can be quite inefficient.
Some well-known monopolistic competition companies in India are ITC limited, Hindustan Unilever Ltd., and Procter and Gamble, among others.
In conclusion, the three market structures, namely, monopoly, oligopoly, and monopolistic competition generate large revenue for a different type of firms and companies looking to do business and make a profit as per their convenience. An oligopoly will allow more than one honcho to co-exist, and a monopolistic competition will allow several players to enter into the market, while a monopoly will essentially be the one that stands apart and rules the entire demand and supply chain in the particular field of selection.
FAQs on Monopoly, Monopolistic Competition, and Oligopoly Explained
1. What are the main forms of imperfectly competitive markets as per the CBSE syllabus?
The main forms of imperfectly competitive markets studied in the CBSE Economics syllabus are:
- Monopoly: A market structure where a single seller controls the entire market for a product with no close substitutes.
- Oligopoly: A market dominated by a few large firms that are highly interdependent.
- Monopolistic Competition: A market with many sellers offering differentiated products that are similar but not identical.
Each structure has unique characteristics regarding the number of firms, product type, and control over price.
2. What is the fundamental difference between a Monopoly and an Oligopoly?
The fundamental difference lies in the number of sellers. A Monopoly consists of a single firm that is the sole producer of a product, like the Indian Railways in the national rail transport sector. In contrast, an Oligopoly consists of a few dominant firms. For example, the Indian telecom market is an oligopoly dominated by a few major players like Jio, Airtel, and Vi.
3. How does Monopolistic Competition differ from an Oligopoly in terms of firm behaviour?
The key difference is interdependence. In an Oligopoly, firms are highly interdependent; the pricing or marketing decision of one firm directly impacts the others, often leading to price rigidity. In Monopolistic Competition, firms act independently. While they compete, there are many firms, so one company's price change has a negligible effect on its numerous competitors. For example, a single restaurant changing its menu prices doesn't force all other local restaurants to do the same.
4. What are the main barriers to entry that help sustain a Monopoly?
A monopoly is sustained due to significant barriers that prevent other firms from entering the market. The primary barriers include:
- Control over Key Resources: When a single firm owns a crucial resource needed for production.
- Legal Barriers: Government-issued patents, copyrights, and licenses that grant exclusive rights to a single firm.
- Economies of Scale: A situation where the existing large firm can produce at a much lower average cost than any smaller potential entrant, making it impossible for new firms to compete on price. This is often called a natural monopoly.
5. Why is the demand curve for a firm in Monopolistic Competition more elastic than for a Monopoly?
The demand curve for a firm in Monopolistic Competition is more elastic because of the availability of close substitutes. If a firm raises its price, consumers can easily switch to a similar product from another competitor. For example, if one brand of toothpaste becomes too expensive, consumers can choose from many other brands. In a Monopoly, there are no close substitutes, so consumers have little choice but to pay the higher price, making the demand curve relatively inelastic.
6. In an Oligopoly, why do firms often engage in non-price competition instead of price wars?
Firms in an oligopoly avoid price wars because of the high risk of mutual loss. If one firm cuts its price, competitors will likely follow suit immediately to avoid losing market share. This can trigger a downward price spiral, reducing profits for all firms involved. Instead, they focus on non-price competition, such as advertising, branding, after-sales service, and product features, to attract customers without altering the established price level. This is a defining characteristic of oligopolistic interdependence.
7. Can a company exhibit characteristics of both a Monopoly and Monopolistic Competition? Explain with an example.
Yes, a company can exhibit different market characteristics depending on the context. For instance, a brand like McDonald's operates in Monopolistic Competition on a national level, competing with many other fast-food chains like Burger King and KFC. However, in a specific location like a small town's highway stop or an airport food court, it might be the only fast-food option available, effectively creating a local monopoly in that limited geographical area.
8. What are some real-world examples of Monopolistic Competition in India?
Monopolistic competition is common in India's consumer markets. Key examples include:
- Fast-Moving Consumer Goods (FMCG): The market for products like soap, shampoo, and toothpaste features many brands (HUL, P&G, ITC) that sell differentiated products.
- Restaurants and Cafes: Cities are filled with numerous restaurants that compete by offering unique menus, ambiance, and service.
- Clothing Retail: The apparel industry has many brands, each with its own style, quality, and brand image to attract specific customer segments.
