Occurs when many sellers offer similar, but not standardized products. The market is competitive because there are many buyers and many sellers that have small influences on segments of the market products that are not exactly like those of their competitors.
Many Sellers and Many Buyers: The number of sellers is usually smaller than any other competition but its effective enough to allow for a good competition. Sellers seem independent when it comes to picking and choosing what product they want to produce, how much to produce, and what price to make it.
Similar but Differentiated Products: Seller gain their limited monopoly-like power by making a distinctive product or by convincing consumers that their product is different from the competition. Like similar restaurants, for example a pizza place, can talk about how their ingredients are high grade quality compared to their competitors to gain a leverage in the system.
Limited Control of Prices: Product differentiation gives producers limited control of price. Business owners charge their products at certain prices that depend on how they want to appeal to the customers. A pizza place, such as Hungry Howies, sell their pizzas for 5 dollar medium box deals on Wednesdays and consumers tend to buy it.
Freedom to Enter or Exit Market: There are generally no huge barriers to entry in monopolistically competitive markets. It does not require a large amount of capital for someone to open a pizza stand, for example. When firms earn a profit from the pizza market, other businesses would enter to increase the competition. With more competitors it forces organizations to continue to find ways to make their product stand out more than others. This can be intense especially for small businesses facing large cooperations in the fight.
Advantages and Disadvantages
Product and Service Quality - A way for firms to improve their product to gain economic profit.
Promotes Competition - The lack of restriction gives a leverage for firms to enter/exit the market as they please.
Differentiation Brings Greater Consumer Choice and Variety - Firms can differ themselves from their competitors to gain more buyers and profit.
Consumers Become More Knowledgeable of Product - Consumers become more informed and aware of their options regarding such products and services.
Can be Wasteful - Firms don't produce enough output to efficiently lower the average cost and benefit from economies of scale.
Allocatively Inefficient - As the demand curve is one which is downward sloping this then implies the price has to be greater than the marginal cost for a monopolistically competitive firm.
Higher Prices - Firms gain some 'market power' and they justify a mark-up
Advertising - Although, as stated earlier, advertising and marketing can be beneficial to consumers on some levels such as providing information to customers and from this an increase in competition, it can also have negative impacts on consumer sovereignty.
As said in the picture "Does it matter? The prices are all the same!" is what Oligopoly is. Sellers offer a similar product for a similar price.
Few Sellers and Many Buyers: Few firms dominate an entire market. There is not a single supplier as in a monopoly, but there are fewer firms than in monopolistic competition.
Standardized or Differentiated Products: Depending on the market, an oligopolist may sell either standardized or differentiated products. Many industrial products are standardized, and few large firms control these markets.
More Control of Prices: Since there's few sellers in an oligopoly, each one has more control over product price than in a monopolistically competitive market.
Little Freedom to Enter or Exit Market: Start-up costs for a new company in an oligopolistic market can be extremely high.
Advantages and Disadvantages
- Large firms having strong hold over the market are able to make huge profits as there are few players in the market.
- Dominant market players usually make long-term profits in an oligopolistic environment. This is possible because the market does not allow an old business to increase its share. It also prevents new players from entering the market through several barriers of entry.
- High profits generated by the companies can be used for innovation and development of new products and processes.
- Oligopoly helps in lowering the average cost of production of goods, as firms producing similar goods can manufacture products in collaboration with each other.
- For customers, oligopoly is advantageous because they can easily make price comparisons among the few players existing in the market.
- Setting of prices may be advantageous for the firms, but if done unrealistically, it may prove to be a great disadvantage for consumers.
- Small businesses in an oligopolistic market fail to establish themselves as a brand because most of the market is captured by larger firms.
- With the presence of little competition, dominant companies may not think of improving their products.
- Firms cannot take independent decisions and always have to consider the views of other dominant players in the market.
- New firms cannot enter the market easily due to various barriers of entry.
- The micro-economic goal of fair wealth distribution is not fulfilled as maximum profit is made by major players only, and small players are left with little profits.
Occurs when there is only one seller of a product that has no close substitues
Only One Seller – Only one business controls the supply of a product that has no substitutes; If there was one oil company that provided oil all around the world
Control of Prices – Selling products at a price they want to because they know there’s no substitute for it; the oil company could alter the prices of gas and anyone who drives would have no choice but to buy that gas at that price
A Restricted, Regulated Market – Government regulations or other barriers to entry keep other firms out of the market; if there was any other oil company to be created, then they would be asked by the main oil company to sell through them
Advantages and Disadvantages
- They can benefit from economics of scale, and may be ‘natural’ monopolies, so it may be argued that it is best for them to remain monopolies to avoid the wasteful duplication of infrastructure that would happen if new firms were encouraged to build their own infrastructure.
- Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues. This is certainly the case with Microsoft
- Inefficient firms, including monopolies, would eventually be replaced by more efficient and effective firms through a process called creative destruction.
- Restricting output onto the market.
- Charging a higher price than in a more competitive market.
- Reducing consumer surplus and economic welfare.
- Restricting choice for consumers.
- Reducing consumer sovereignty.
There's different types?
A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Government often regulate certain natural monopolies to ensure that consumers get a fair deal. The utilities industry is a good example of a natural monopoly—Gas , Water, Power.
It emerges as a result of economies of large scale production, use of capital goods, new production methods, etc. engineering goods industry, automobile industry, software industry are good examples of this market structure. Internet Explorer was the only browser available to browse the web between 1995-2000.
Geographic monopolies occur when there is only one company that offers a particular good or service in an area. For example, in a small town there may be only one general store, which has a monopoly on the goods it sells. Because of the small size of the town, it may not be financially feasible for another company to come in--if the profits were split neither business would make money.
Sometimes a government will pass laws reserving a specific trade, product or service for government agencies. For example, many times a government agency will be in charge of running water. The legal barriers that are put up prevent companies from competing with the government.