Monopolistic Competition and Oligopoly - Essay Example

In the short run, the firms operating in monopolistic markets can act as monopolies but in the long run, the other firms enter into the market and the gains of differentiation take the downward sloping curve with competition (Cashel-Cordo, n.d, p. 23). 

Oligopolistic competition
Oligopoly is regarded as the market structure where there are large firms operating in the market with significant barriers to entry. The oligopolists are aware of the conditions prevailing in the market as the market is dominated by only a few sellers. The decision undertaken by one firm will influence the other firms operating in the market as well as the market as a whole. The decision or the responses of the market participants should be taken into account in the planning process. The prevailing competition in the market structure can give rise to different outcomes. An operating firm in an oligopolistic firm can maximize the profit by operating at the level where marginal revenue is the same as marginal costs.

Differences
The primary differences between the two types of market structures are in terms of relative size and control of the market of each firm on the basis of the number of competitors in the existing market structure. It is difficult to find clear-cut evidence that cites the differences between the two market structures. Some industries can possess the characteristics of both oligopoly and monopolistic firms. With the decrease in the level of competition, the firms tend to behave more likely to that of oligopoly and less likely to that of monopolistic competition. The monopolistic market structure offers differentiated products. The suppliers are aware of the price system existing in the market i.e. they are the price makers. The barriers to entry are not stringent in the short run but in the long run, the firms can enter or leave the industry. The sellers can act in an independent fashion within the market. The demand curve slopes downward and is more elastic than that of monopolists (Economics, 2012).

The firms operating in the oligopolistic market structure are interdependent. The products offered can be homogeneous as well as can be differentiated across producers. The interdependence among the firms is correlated with the homogeneity of the products.  A huge amount of investment is usually associated with entry into the oligopolistic market. In this market structure, the firms can collude and impose some restricted trade practices with the aim to raise prices. The profit of the industry is maximized with the collusion of firms. If one firm believes that the other firm will keep the output level constant it can raise the productivity so as to gain maximum revenue. In a situation characterized by the cartel, the firms can recognize the significance of joint profits from producing each unit of output. However, if one firmly believes that the other firm will increase the level of productivity, then the other firm will try to increase the productivity faster to gain the first-mover advantage (Central Washington University, 2003, p. 3). In this situation, the cartel will break.

The significance of market structures on the interests of consumers
As long as the consumers are happy in demanding one product regardless of the prices of other products the seller of the product will be acting as a monopolist. But in the case of monopolistic competition, the happy state is facing the constraint of a huge number of products available. If the firms raise the price of that product the consumer will switch to a different brand of the same product line (University of Colorado, 2010, p. 3).  The monopolistic firms are always in the thoughts to differentiate their products from their competitors. Therefore in monopolistic competition, the consumer's well is are accruing the benefits of greater product variety. Close substitutes of the products are also available and so the competitive price is useful on the part of the consumers. The figure below will depict the idea better.

The area denoted by A is the lost consumers’ surplus while area B is lost produces’ surplus. In monopolistic competition, the firms do not produce at the minimum point of ATC and they are not interested in equating price and marginal cost. Productive efficiency is not attained if the price is greater than a minimum point of ATC. In this case, the firms are wasting the productive efficiency and in turn, affecting the consumers. With prices greater than marginal costs the firm is not allocating the products according to the desire of the society (Keppler, 1994, p. 24). The diagram below will depict the behavior of the firms in oligopolistic competition.

At P1, the consumers will like to purchase products from other firms and so they would lose a large share of the market. The loss of revenues will lead to increase in price which will hurt the consumers. If one firm takes the initiative to increase price the other firms will follow and the industry price will rise as a whole. In this type of market structure, the firm may engage itself in predatory pricing (Krčílková, n.d, p. 5). In this scenario, the already existing firm forces a new entrant out of the business which means the consumers are devoid of competition and the economy is affected. In oligopolistic competition the firms may not compete as well. It depends upon the objectives of the incumbent firm on whether it will compete or not (Solow, 1998, p. 35). Therefore from the above discussion it can be stated that the interests of the consumers are best protected in monopolistic competition.