What is the difference between oligopoly and monopolistic competition?
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Q. What is the difference between oligopoly and monopolistic competition? An oligopoly market structure is one in which there are a few large producers who are present in the industry and account for most of the output in the industry, there are many small firms but these few large firms dominate and have concentrated market shares. Whereas monopolistic competition is a market structure that has a large number of sellers, each of which is relatively small and posse a very small market share. Another feature of an oligopoly is that there are some barriers to entry and exit into the industry.
In monopolistic competition there are no barriers to entry or exit, so as with oligopolies, in short run they earn abnormal profits, but they cannot sustain this level of abnormal profits in the long run due to competitive pressures since other firms are free to enter and exit the industry and often firms enter and " eat into" the abnormal profit of the monopolistic producers as shown in the graphs below. In an oligopoly, firms are interdependent, e.g. as shown in the graph below, if firm X decides to lower its price from B to D, sales should increase from A to C but since firms are interdependent, other firms would retaliate and lower their prices too.
In monopolistic competition, firms are independent of each other, this means that, if as in an oligopoly a firm reduces price, other firms would not follow suit. Monopolistic firms are not price takers like those in perfect competition, so they can increase its price without losing all of its customers. But because there are many close substitutes, monopolistic firms have relatively weak market power. Another distinctive feature of an oligopoly is that there is relative price stability. As shown in the graph below, between price W and V, the marginal revenue earned by the firm is the same so increasing the price would not change their income thus they would fix a price. Price stability is not a key feature in monopolistic competition as it is with oligopolies.
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