Distinguish between Monopolistic Competition and Oligopoly
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Distinguish between Monopolistic Competition and Oligopoly Monopolistic competition is a market structure where a large number of small firms produce non-homogeneous products and where there are no barriers to entry or exit. Within the market the large number of small firms, act independently from one and another. In addition, all the firms are short run profit maximisers and there is, as well, perfect knowledge within the market. An example of a market under Monopolistic Competition Is the Hotel Trade. The concentration ratios are low, and any power which a form within the market is relatively low. Firms, which are monopolistic competition, are not price takers, like firms in perfect competition, but because there are a large number of firms, an increase in the price level of a good will lead to a large increase in the quantity demanded of the goods' substitute, in other words demand is relatively elastic. In the short run, the cost curve diagram for a firm under monopolistic competition is the same as that for a pure monopolist. The firm has a downward sloping curve and profit maximises at output point Q and price level P (refer to figure 1(a) over page) In the short run abnormal profits are being achieved and brings an incentive for new firms to enter the market, as long as they have differentiated products.
However, if the firm decreases its price its competitors will reduce their prices too in order to prevent an erosion of their market share. The firm will gain little extra demand as a result. For example, figure 2(over page) shows the kink in the demand curve at price P and output Q means that there is a discontinuity in the firm's marginal revenue curve. If we assume that the MC cost in fig 2(a) is cutting the MR curve then the firm is profit maximising at this point. In fig 2(b), we see that a rise in marginal costs will not necessarily lead to higher prices providing that the new MC curve (MC1) cuts the MR curve at the same output. The kinked demand curve theory suggests that there will be price stickiness in these markets and that firms will rely more on non-price competition to boost sales, revenue, and profits. In conclusion, many differences can be spotted between the two markets and how they operate, for example firms under Monopolistic Competition depend more on the price level where as firms under Oligopoly depend more on non price competition methods, such as advertising and marketing. 1. Why are prices in Oligopoly likely to be stable Prices in oligopolies are likely to be stable as firms rely more on non-price competition to boost their sales and profits.
The promotion of the product is very important to firms, as it is the only way customers are informed about the product. Finally, the placement of the product at the right time for the customer is essential. National-chain food retailers have a variety of different methods of non-price competition. Firstly, the extension of their opening hours enabled customers to shop in the late hours of the night if they wanted any groceries or any other commodities. Secondly, the introduction of Internet shopping and home delivery system, where customers were able to order their shopping from home, and have it delivered to their home as soon as possible. This would especially be helpful to people without a motor vehicle or to the disabled. The food retailers introduced a banking system for their customers offering them low rates and making it easier for them to take out a loan. They also introduced loyalty cards for their customers offering them special deals, in store and offering them the chance to win holidays and other luxury items. The stores also having petrol pump on site at discounted prices, for their customers allowing them to shop as well as filling up their petrol pump. In conclusion, oligopolies are likely to have price stability in their markets because there is a high usage of non-price competition between the firms and therefore price itself is not affected. Page 1 of 5
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