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Monopoly Firm, Monopolistic Competition and Oligopoly

Last updated date: 21st Feb 2024
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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 Firm, Monopolistic Competition and Oligopoly

1. What is the Main Difference Between Monopolistic Competition and Oligopoly?

Ans: In monopolistic competition, one has the freedom and flexibility of entering and exiting as and when they want to, which often allows indulging firms to set their price points. In an oligopoly, several companies offering similar products enter the market structure and provide the consumer with an option of choosing from one of them. The price points in these are often similar and depend on each other to ensure a regular flow of business. This means that companies in monopolistic competition can set their prices, and profits will occur as per the demand. In an oligopoly, to ensure that the engaging company does not lose important business, they will keep their costs similar to that of their competitors.

2. What are Some of the Factors of a Monopoly that Make it Dominate the Market?

Ans: Three main factors of a monopoly ensure that the company controls the market without the interference of unwanted competitors. These three factors are:

  1. Legal Obstructions – Patents and copyrights play a huge role in deterring other competitors from trying to enter the same zone as a monopolising company. Such legal obstructions allow the originality of the company to stay put and get rid of copycats too. This results in added assistance to building a monopoly.

  2. Resource Control – Occurring when the service providing or product making company is also the sole seller of the raw materials, resource control nips it in the bid for other companies as they would not have access to the raw materials and, in turn, would not be able to aid in the production of the same.

  3. Important Information – Vital information that is strictly kept within the monopolising company is a sure-shot way of ensuring that other companies don't come close to jeopardizing the monopolising company’s dominance in the market. Such information is often procured and kept top secret.