Understanding Monopolistic and Oligopolistic Market Structures

Monopolistic Short Run:

Profit: If firms are making profits in the short run, new firms will be attracted to enter the market. Since there are no barriers to entry, they can do it easily. As they enter, they will take business away from existing firms, whose demand curve will start shifting to the left.

Losses: If firms are making losses, some firms in the industry will leave the market. The firms that remain will find that their demand curve starts shifting to the right as they pick up trade from the leaving firms.

Long Run: Firms will end up with normal profit. Each firm is exactly covering its costs, including opportunity costs, and so there is no incentive for firms to leave the industry. Firms outside the industry will not enter since they will be aware that their entrance could lead to losses for everyone. If new firms enter the market, since there are low barriers to entry and good information about market conditions, firms will compete with these established firms and can erode away any abnormal profit. Consequently, individual firms' demand curves will shift to the left as consumers are shared among new firms, and demand will continue shifting until AC = AR (normal profit).

Interdependence: Since there are a small number of firms, each needs to take careful notice of each other's actions. This will tend to make firms collude and avoid unexpected outcomes.

Collusive Oligopolies: Firms collude to charge the same prices for their products, effectively acting as a monopoly and dividing any profit that can be made.

1. Formal Collusion (Cartels): Firms agree on the price that they will charge, although sometimes it could be an agreement on market share, marketing expenditure, or limiting and fixing the quantity. This results in higher prices and less output for consumers; this is usually illegal.
2. Tacit Collusion: Firms charge the same prices without any formal collusion. A firm may charge the same price as another by looking at the dominant firm in the industry.

Collusive oligopolies act as a monopoly; therefore, their share of long-run monopoly profits will make them keep prices stable (Price Rigidity).