Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.
In monopolistic competition, we still have many sellers [as we had under perfect competition]. Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch [at least temporarily].
How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.
Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.
Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.
In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly, however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.
There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal. Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.
A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years [United States Patent and Trademark Office, General Information Concerning Patents, April 15, 2006, [accessed January 21, 2012].
Market, by its very nature, leads to the formation of both perfect and imperfect competition within it. Imperfect competition can be further categorized into oligopoly, monopoly, and monopolistic competition.
Let's find out more about monopoly and monopolistic competition!
What is a Monopoly?
Monopoly has such a type of market structure, where there is only one firm present in it. This firm enjoys absolute power in producing and selling the product or service. Products offered in a monopoly market do not have any close substitutes.
Monopoly is most likely to be found in the public utility sector.
Also, the combined effect of various characteristics of the monopoly market ensures that the market player is a sole price setter. Buyers cannot influence prices. Price is set by the firm taking into account the demand elasticity of a product, product demand, and maximization of profit.
Example of Monopoly
An instance of monopoly competition can be found in the government sector. Government has a monopoly over infrastructure such as dams, railways etc.
These sectors count as a monopoly market with the government as the only entity because the competition is non-existent. The characteristics of the services and products in such a market are determined by the government.
What is Monopolistic Competition?
Monopolistic competition is the market setting that includes differentiated products offered by a handful of sellers present in the market. Product differentiation is undertaken through packaging, brand name, trademark etc.
Monopolistic competition is evident in the manufacturing industry.
The characteristics of monopolistic competition such as differentiated products and a handful of sellers influence the prices of products or services. Consumers in a monopolistic market buy more products when prices are comparatively lower. Firms set product prices, taking into consideration marginal cost and revenue as well as profit maximization.
Example of Monopolistic Competition
Monopolistic competition can be seen on television programmes. With the advent of globalization, consumers have greater choice in the variety of shows from which to choose. The television programmes offered across the world are also diverse. However, there are only a few companies that broadcast those shows.
Major differences between monopoly and monopolistic competition have been discussed below.
Monopoly vs Monopolistic Competition
Parameters
Monopoly
Monopolistic Competition
1.
Concept
A monopoly market does not involve any entity apart from a single seller and consumers. The market for the particular product or service is created by the firm, in the first instance.
A particular product is offered by a handful of entities in the market. The number of market players is less, and there is competition among those entities.
2.
Player
Monopoly is a single-player market.
Monopolistic competition is found in a market of a small number of players. There will be necessarily more than one entity.
3.
Competition
The seller in a monopoly market does not experience any competition.
Few players are present in a monopolistic market. There exists minimal competition among those players in that market.
4.
Demand and Supply
In a monopoly market, demand and supply are entirely calibrated by the firm. It is all the more likely that it is skewed in favour of that seller.
The firms do not exert control over demand and supply owing to the competition between market players.
5.
Entry and Exit
Given the nature of this market, both entry and exit are difficult.
On account of competition in a monopolistic market, entry and exit are relatively easier.
6.
Product price
The existence of a sole player in a monopoly market causes buyers to retain no control over product prices. The price quoted by the seller will have to be accepted by buyers.
Due to the presence of multiple entities in the market, buyers have the option of purchasing the product or service at a competitive price. This factor is taken into consideration when firms engage in the pricing of their product or service. Hence, due to the availability of options, buyers can influence the price.
7.
Product variety
Product variants are the sole discretion of a seller. There is no external factor that would cause it to consider extending the variety of products on offer.
Demand from buyers’ end usually leads market players to launch different varieties of a product on offer. It may also amount to be a differentiating factor from its competitors.
8.
Product predictability
Product predictability is high due to the presence of only one seller in a monopoly market.
More number of players in a monopolistic market makes product predictability low.
It can be understood that, in a monopoly market, the seller has the discretion to charge different prices to different sets of customers. It is known as price discrimination. However, in monopolistic competition, there exists non-price competition. Sellers in this market cannot adopt a price discrimination policy for their customers.
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