What is the difference between oligopoly and monopolistic competition?

The barriers act as a strong deterrent to firms that want to come into the industry and " eat into" the abnormal profits and then exit the industry. Thus not many firms dare to venture into the industry; therefore oligopolies can earn abnormal profits in the long run as well unlike firms in monopolistic competition.

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. So for firm X sales would increase only by AE not AC.

But since " price wars" only lead to a loss in revenue for these firms they often choose to engage in non- price competition, i.e. enhancing the product itself or improving promotions via after sales service or competitions, in order to encourage brand loyalty.

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.