Kelsey Delgado

ECON 2010
Principles of Micro Economics
Monopolistic Competition vs. Oligopoly
When discussing competitiveness in terms of economics there are four
levels of market structures: pure competition, monopolistic competition,
oligopoly, and pure monopoly. Most market structures which are present in
todays economy fall under the categories of either monopolistic competition
or oligopoly. In order to better understand these two market structures we
are going to look at what classifies a market as being either a monopolistic
competition market or an oligopoly market and the economic efficiency
associated with both market structures.
Monopolistic competition is categorized by three main characteristics.
First, that within a monopolistic competition market structure there are a
relatively large number of sellers. However, because there are not the same
number of sellers as one would find within a pure competition market
structure one will find that monopolistic competition markets have smaller
market shares, do not experience collusion, and firms within the market act
independently of one another. The second characteristic of a monopolistic
competition market is that firms within this market structure have
differentiated products. These differentiations can be found in the product
attributes, services associated with the sale of the product, the locations
where a product may be available, a products brand name and packaging,
and/or the price. The third and final characteristic of a monopolistic
competition market is the ease which a firm can enter and/or exit the
industry.
In contrast oligopoly market structures are categorized by three
distinctly opposite characteristics. First, that within an oligopoly there are
only a few large producers (few in terms of the associated industry). Second,
firms within oligopoly markets share mutual interdependence because their
profits are not only determined by their individual actions but also take into
account the reaction of rival firms. Finally, an oligopoly market will have
entry barriers, similar to those found in a pure monopoly market structure.
While monopolistic competition markets and oligopoly markets are
vastly different in regards to their characteristics, they are similar in regards
to their economic efficiency. Neither productive efficiency nor allocative
efficiency is realized in either of these market structures. In a monopolistic
competition market this lack of efficiency can be attributed to the ease with
which firms can enter and exit the industry. This constant turnover within the
industry results in deadweight losses and excess capacity, which in turn
negatively impacts economic efficiency. Whereas in an oligopoly market
price generally exceeds cost, and production falls below output which will
also result in a similar lack of efficiency.

Though the range of market structures varies dramatically, from its

characteristics to its economic efficiency, each market structure has benefits
which give them the potential for success and profitability. Understanding
how each market works, helps us to also understand how they impact one
another and ultimately how they influence our economy.