Market Structures: Oligopoly and Monopolistic Competition

Oligopoly Market Characteristics

An oligopoly is a market structure situated between perfect competition and a monopoly. It consists of a few vendors that offer either homogeneous or differentiated products and possess the power to influence the price of goods. A market is also considered an oligopoly when, despite having many producers, a few capture the majority of sales. This is one of the most common market structures.

Interdependence in Oligopolies

The main feature of these markets is the interdependence between companies. Any action undertaken by one of them has a direct impact on the prices and production of its rivals. Competitors react, which is essential for the strategy adopted by each seller.

Price Determination in an Oligopoly

The interdependence of participant actions and strategic driving are phenomena peculiar to oligopolies and non-existent in other market types. In this setting, the company acts as a price maker. We can distinguish two types of behavior:

Collusive Oligopoly Strategies

In a collusive oligopoly, the business strategy is to reach an agreement, cooperate, and act as a single producer. There are two main types of collusive strategies:

• Cartels: Companies agree to limit competition by setting prices as a monopoly and dividing the production balance among themselves.
• Price Leadership: A form of implicit collusion where one company acts as a leader and others follow. When the leading company raises its price, it signals other businesses to change theirs. If the others follow, the group maintains collusion; if not, the leader may return to the previous state of the group.

Non-Collusive Oligopoly and Price Wars

In a non-collusive oligopoly, companies are unable or unwilling to reach agreements. Strategy becomes the relevant question, and there are no firm predictions on reaching equilibrium. This often leads to habitual price wars, where firms compete by reducing prices, and customers stand to gain in the short term.

Monopolistic Competition Dynamics

This imperfect market structure comes closest to perfect competition. While many companies are involved, there is a crucial difference: the goods and services exchanged are not homogeneous. Although they are good substitutes, each firm sells a product that differs slightly from those offered by competitors. This product differentiation creates minor barriers to entry.

Product Differentiation and Branding

Examples of monopolistically competitive markets include cleaning products, personal care, and clothing. Companies differentiate their products through quality and branding. A single company may sell its products under various commercial brands. To distinguish their products and attract consumers, companies rely heavily on advertising and marketing.