Analysis of Monopoly and Oligopoly Market Structures

This report provides a comprehensive analysis of monopoly and oligopoly markets, exploring their definitions, characteristics, and the key differences between them. It begins by defining oligopoly as a market structure dominated by a few firms and monopolistic competition as a market with many firms offering differentiated products. The report then delves into the market structures, using diagrams and examples to illustrate concepts like the kinked demand curve in oligopoly and the behavior of firms in monopolistic competition. It discusses relevant theories, including the kinked demand curve theory and market structure theory, to explain pricing and output decisions. The report highlights the core differences in firm size, product differentiation, and market behavior, providing a comparative analysis to understand the dynamics of both market types. Finally, the report concludes by summarizing the key distinctions and inefficiencies associated with each market structure, offering a clear understanding of their implications in the broader economic landscape.

Running head: MONOPOLY AND OLIGOPOLY MARKET
Monopoly and Oligopoly Market
Name of the Student
Name of the University
Author note

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Executive Summary
The report helps in understanding the monopolistic and oligopoly market in the entire
competitive market. The different theories relating to monopolistic and oligopoly market has
been discussed in an effective manner. The differences have been discussed in such a manner
that this helped in analyzing the issues in both the markets.
The main aim and purpose of the report is to understand the differences between the
monopolistic and oligopoly market. The different theories have been analyzed in an effective
manner, as this will help in understanding the different issues in both the markets.
The conclusion is based on analysis of the different theories and their effectiveness in the
oligopoly and monopolistic competition. The different examples has helped in understanding the
issues in both kind of markets.

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Table of Contents
1. Introduction......................................................................................................................2
2. Definitions of Oligopoly and Monopolistic Competition................................................3
2.1 Definition of Oligopoly Market.................................................................................3
2.2 Definition of Monopolistic Competition...................................................................3
3. Monopolistic Competition and Oligopoly Market..........................................................4
4. Theories on Monopolistic Competition and Oligopoly Market......................................9
4.1 Kinked demand curve theory of Oligopoly Market...................................................9
4.2 Market Structure theory of Monopolistic Market....................................................10
5. Examples........................................................................................................................12
5.1 Monopolistic Competition.......................................................................................12
5.2 Oligopolistic Competition.......................................................................................12
6. Core differences between Oligopoly and Monopolistic Competition...........................14
7. Conclusion.....................................................................................................................15

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1. Introduction
The report helps in analyzing the difference between the monopolistic competition and
oligopoly. The two kinds of market will be discussed in the next sections with the help of
different price theories. The different usage of theories and examples will be provided in such a
manner that will help in analyzing the difference between the two theories. Perfect competition
and monopolistic competition are opposite to one another wherein for perfect competition, there
are different markets in firms who sell identical products. On the other hand, monopolistic
competition is defined as wherein there are no such kinds of close substitutes in the entire
competitive market.
The main aim of the report is to understand the differences between monopolistic
competition and oligopoly market. The different theories will be used in such a manner that this
will help in understanding the major differences in both the markets. The main purpose of the
report is to understand the different examples along with articles related to the oligopoly and
monopolistic competition. With the help of different models and diagrams, the analysis will be
done, as this will be easier to understand the monopolistic and oligopoly market in short along
with long run.
The structure of the report is based on the introduction of the two concepts namely
oligopoly and monopolistic market. The different theories will be discussed based on these
markets, as this will provide clear view on both the markets. The total cost curve along with
average along with marginal revenue and marginal cost has to be analyzed in an effective
manner. Lastly, the conclusion has to be provided regarding the differences that have been
analyzed between the monopolistic and oligopoly market (Head and Spencer 2017). The

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inefficiencies of both the markets have to be discussed in details with usage of theories and
concepts.
2. Definitions of Oligopoly and Monopolistic Competition
2.1 Definition of Oligopoly Market
Oligopoly is the structure of the market wherein there are only firms who dominate the
entire market. When the entire market is shared between few firms, it is known as highly
concentrated. This kind of market is wherein the small number of companies has major portion
of shares in the entire market (Whisenant and Willenborg 2016).
For instance- The operating systems of different computers and smart phones is the best
example of oligopoly market wherein Google Android and Apple iOS are dominating the entire
market, however the operating systems of the computer systems are overshadowed by Windows
and Apple
2.2 Definition of Monopolistic Competition
Monopolistic Competition is defined as the theoretical concept wherein there is only
market in the entire competitive market (Neary 2016). This is opposite of the perfect competition
as in monopolistic competition, there is only one firm who provides and offer products to the
customers and is dominant in nature as well (Spanjers 2017). However, on the other hand perfect
competition is wherein there is large number of firms who are operating in the market.
For instance- Nike is a monopolistic competition wherein the features and aspects are of
perfect competition. However, the products are not likely the same as their competitors in the
market such as Under Armour and Adidas

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3. Monopolistic Competition and Oligopoly Market
The main fundamental difference between the Oligopoly market and Monopolistic
competition are the size and number of firms in the entire market place. These different
characteristics help in determining impact of the pricing decisions of the single firm (Dewenter,
Heimeshoff and Lüth 2017). The monopolistic competition is apt and is found mostly in retailing
and distributing market wherein the market is divided into small segments wherein there is no
such suffering of diseconomies of scale. However, oligopoly market is found wherein economies
of scale require that the entire market can be supplied with the large firms that are few in nature.
This kind of situation is found mostly in international banking and insurance sector (Taylor and
Wagman 2014).
Furthermore, it can be analyzed that both oligopoly and monopolistic market have
different group of products that are having different close substitutes, however there are
differences in the eyes of the buyers in the market. It can be seen that both oligopoly and
monopolistic competition is perfect in nature rather than impersonal in nature (Schweinberger
and Suedekum 2015). Each of the sellers is aware acutely of the competitors in the market and
trying to gain competitive advantage (Kufel-Gajda 2017).

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Figure1: Monopolistic Competition
(Source: Haaland and Venables 2016)
In the above figure, it can be analyzed that d1d1 is the original short run demand curve
and d2d2 is the demand curve after the long run adjustment. Marginal Revenue is the original
curve of marginal curve (Haaland and Venables 2016). As shown in the figure, the organization
can earn excess amount of profit in the short run with output Q1 and price is P1. In the long run,
the existence of the level of high profit is such that it is providing signals to other firms to enter
into the market (Fujiwara and Teranishi 2017).
While seller of Tacos can differentiate marginally his Taco from other competitors in the
market, the absence of the different barriers to the entry that means that, the potential
competitors will help in emulating the success along with reducing the power of pricing (Sumner
2018). From the diagram, it can be analyzed that monopolistic competition has three main
characteristics such as:
There are different kind of buyers and sellers

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The sellers offer products that is differentiated in nature
Easy entry and exit of the entire market is easy in nature
It helps in relaxing the homogeneity of the product and the aspect of the monopolistic
approach is wherein the two products are not the same. The competitors who are monopolistic in
nature faces curve that is downward sloping in nature. The monopolistic markets can sell more
products at low prices than the competitors in the market can earn (Gugler and Szücs 2016).
Monopolistic competition in SR
The demand curve that is faced by monopolistic competition is same like the monopoly
market that is downward sloping in nature. Furthermore, MR<P, the goal will be to set MR=MC
to maximize the profit. Furthermore, it can be seen that monopolistic competitor raises their
price; there are different options for the customers in the market to buy the similar kind of
products in the market but not the identical products elsewhere. The demand curve that is faced
by the monopolistic market is more elastic in nature than the monopolists are. In SR, the firm can
make economic profit or economic loss (Larivière, Haustein and Mongeon 2015).
Monopolistic competition in LR
In the LR, the profit helps in attracting the entry in such a manner that it shifts the
demand curve of the firm to the left along with MR curve. Entry will take place until P=ATC
wherein it will occur till the demand curve becomes tangent to the ATC (Average Total Cost
Curve)

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Figure 2: Monopolistic Competition as per ATC
(Source: Whisenant and Willenborg 2016)
From the above diagram, it can be analyzed that monopolistic competition is socially
desirable structure of the market as the power of monopoly is smaller in nature. As the brands are
substitutable in nature, this means that all the companies will face elastic demand curve as
average total cost curve is minimum in nature. The customers in the entire competitive market
value the diversity of the product.
Oligopoly Market

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Figure 3: Oligopoly Market
(Source: Kumar and Chatterjee 2015)
The figure helps in analyzing along with describing situation of the interdependence in
such a manner that individual kind of oligopolist face the kinked kind of demand curve. In the
figure, it is numbered as DAB and this will be unable for them to depart from current price P3.
When the oligopolist in the market increases the price, they fear that the sales will fall in a
manner. However, if he lowers the price to P3 in a unilateral manner, everyone will match the
price and this can be worst situation. The kinked demand curve will help in describing
equilibrium situation that is static in nature and there will be no such change in the price.
In the oligopoly market, the nature of products is similar in nature and the curve of the
price is price elastic in nature. The demand curve is affected directly with the help of
competition. In oligopoly market, the decisions of pricing is based on strategic pricing and the
relation between P and MC is P>MC. There is huge possibility of profit in the end in the entire
oligopoly market. The main characteristics of the oligopoly market are wherein there is huge
interdependence of the different firms in the process of decision-making. The different firms in
the oligopoly market is inter dependent closely on one another. The other feature of oligopoly
market is there is lack of uniformity in the size of the different firms. This kind of situation is
known as asymmetrical and this is common in economy of America wherein the uniform size is
rare in nature.
In the oligopoly market, the oligopolist marketers have to stick to the price and this will
lead to price war situation in the entire competitive market. There are different forms of
oligopoly that includes the following:

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Open Oligopoly is wherein the firms are free to enter the market without much difficulties
Closed Oligopoly is wherein there are different kind of restrictions that has to faced in
the market
Perfect Oligopoly is wherein the different kind of products are identical in nature
Imperfect Oligopoly is wherein the different firms in the market sell different kind of
products
Competitive Oligopoly is when there is no such cooperation between the different firms
and they are competitive in nature
4. Theories on Monopolistic Competition and Oligopoly Market
There are differences between the Monopolistic Competition and Oligopoly market
wherein the general theory on pricing helps in postulating the market conditions spectrum. This
ranges from perfect kind of competition at one extreme and monopolistic at other hand.
Furthermore, according to Bertoletti and Etro (2017), large number of market structure that is
theoretical is possible in nature. The different theories help in understanding the different issues
in the management in an effective manner. The nature of the products will be explained in such a
manner that it helps in understanding the different demand curve theories along with collusion in
the market.
4.1 Kinked demand curve theory of Oligopoly Market
The kinked demand curve theory in the oligopolistic market was developed in the year
1939 that helped in explaining the different characteristics related to rigid price and when there is
increase in the cost (Snow 2015). This respective theory has different implications that include
that when the demand curve becomes less elastic in nature when there is fall in the prices;

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however, the demand curve that is oligopolistic in nature becomes less elastic in nature at the
kink. Furthermore, it causes mathematically wherein it causes sudden change in the MR curve to
different positions.
Figure 4: Absorption of rise in costs in Oligopoly market
(Source: Snow 2015)
From the diagram, it can be analyzed that there can be increase or decrease in the MC
curve between the discontinuity. In such a situation, the oligopolist will reduce the costs and
absorb the higher costs as shown in figure 4. There are different criticisms on the theory that
includes there is perceiveness of the oligopolist to create a kink in the market. It has been seen
that any kind of stability that is perceived in nature in the oligopoly market is not due to the
kinked demand curve, but there can be different other reasons as well.
4.2 Market Structure theory of Monopolistic Market
The competitive market in the monopolistic market makes decisions that are independent
in nature about the output and price. In the short run, the profits that is supernormal in nature is
possible, however in the long run, there are new firms in the industry that are been attracted.