Oligopoly and Monopolistic Competition: Market Structures Explained

Oligopoly

An oligopoly refers to a market dominated by a small number of sellers offering similar products to a large number of buyers. These sellers can either collude to set prices, effectively acting as a monopoly, or compete against each other.

Collusive Oligopoly

In a collusive oligopoly, sellers cooperate to fix prices and allocate market share. This practice harms consumers through higher prices and reduced choice. Such collusion is often illegal and subject to penalties.

Price Leadership

One form of collusion involves price leadership, where a dominant firm sets prices, and other firms follow suit.

Non-Collusive Oligopoly

A non-collusive oligopoly occurs when sellers act independently and compete on factors like price and quality, benefiting consumers.

Monopolistic Competition

Monopolistic competition describes a market with many sellers offering differentiated products that are similar but not identical. Branding, design, and marketing create distinctions between products. Each firm has some degree of monopoly power over its specific product variation, but still faces competition from other similar products.

Example: Milk brands like "La Asturiana" and "Pascual" compete in a broader market while maintaining individual pricing power.

Externalities

Externalities are the unintended side effects of production or consumption that affect third parties not directly involved in the transaction.

Types of Externalities

• Positive Externalities: These improve the well-being of others. Example: Education benefits not only the individual but also society as a whole.
• Negative Externalities: These harm the well-being of others. Examples: Pollution (air, water, noise), traffic congestion.

Addressing Externalities

• Positive Externalities: Government support and incentives can encourage activities with positive externalities.
• Negative Externalities: Regulations, taxes, and other policies can help reduce or eliminate negative externalities. These may include environmental regulations, pollution taxes, or fines for harmful activities.