Monopolistic Competition and Oligopoly

So far, we have discussed two market structures, pure competition and monopoly. These are the two extremes. Pure competition is the most competitive, and monopoly the least competitive. The two market structures in between these two extremes are monopolistic competition and oligopoly. In this unit, we will first discuss monopolistic competition. Then we will discuss oligopoly.

Characteristics of Monopolistic Competition

Four characteristics of a monopolistically competitive industry are:

1. Many sellers.
There are many sellers in this industry. Thus, there is a lot of competition.

2. Easy entrance.
Firms in monopolistic competition are small. It’s easy for new firms to enter this industry and for existing firms to exit. Barriers to entry and exit are low.

3. Differentiated products.
Firms in this industry sell differentiated products. Unlike in perfect competition, products are not identical.

4. Local Advertising.
Firms in this industry frequently advertise. Because the firms are small, this is usually done on a local level.

Characteristics 1 and 2 are the same as in perfect competition. Characteristic 3 means that firms in this industry sell products that are similar but slightly different. The difference may be in the packaging of the product, the ingredients, the service associated with the product, the name of the product, etc. It is also possible that there may not be real differences, but only perceived differences by consumers.

Advertising (characteristic 4) helps to emphasize these differences to consumers.

Characteristics 3 and 4 usually result in competitors charging slightly different prices for their products. Competitor A may charge $3, while competitor B charges $2.85. Firms have some control over the price, and the demand curve is, therefore, downward sloping for each firm.

Examples of Monopolistically Competitive Industries

The following are examples of monopolistically competitive industries:

  1. Retail clothing stores
  2. Retail shoe stores
  3. Gas stations
  4. Fast food restaurants
  5. Car dealers
  6. Pizza restaurants
  7. Financial consulting services
  8. Legal services
  9. Medical and dental offices