Difference Between Oligopoly and Monopolistic Competition

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 the short run, oligopolies are

able to earn abnormal profit, but in the long run as well they are

able to sustain abnormal profits due to the barriers to entry and

exit.

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.