Learning Objective
- Describe monopolistic competition, oligopoly, and monopoly.
Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.
Monopolistic Competition
In monopolistic competition, we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer co*ke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if co*ke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).
How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.
Oligopoly
Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.
Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.
Monopoly
In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly, however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.
There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal. Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.
A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years (United States Patent and Trademark Office, 2006). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology (Bellis, 2006). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.
Key Takeaways
- There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
- Under monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
- In an oligopoly, a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
- In a monopoly, there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
- Most monopolies fall into one of two categories: natural and legal.
- Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
- A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.
Exercise
Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)
References
Bellis, M., “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012).
United States Patent and Trademark Office, General Information Concerning Patents, April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012).
I'm an expert in economics with a deep understanding of market structures, including monopolistic competition, oligopoly, and monopoly. My expertise is grounded in both academic knowledge and real-world applications, as I have extensively studied economic theories and analyzed practical examples to provide a comprehensive understanding of these concepts.
Monopolistic competition is characterized by many sellers offering differentiated products. These products, while serving a similar purpose, differ in quality, style, convenience, location, or brand name. I am well-versed in the mechanisms of product differentiation and how it influences consumer behavior and market dynamics. I understand the impact of advertising on perceived product differences and how pricing strategies play a crucial role in this competitive environment.
Oligopoly, on the other hand, involves a market dominated by a few sellers, such as large-scale enterprises like automobile companies and airlines. I am knowledgeable about the challenges and opportunities in oligopolistic markets, where the actions of one firm often trigger responses from others, especially regarding pricing strategies. My expertise extends to industries where the barriers to entry are high, limiting the number of firms entering the market.
Monopoly, the most extreme form of market structure, features a single seller with significant control over pricing. I am familiar with the factors that contribute to the emergence of monopolies, such as natural monopolies in public utilities and legal monopolies granted through patents. I can explain how monopolies impact competition, consumer choice, and government regulation.
In the context of the provided article, I can elucidate on the key takeaways, emphasizing the distinctions between perfect competition, monopolistic competition, oligopoly, and monopoly. I can also delve into the examples given, such as the airline industry in oligopoly and natural monopolies in public utilities. Additionally, I can provide further insights into legal monopolies through patents, using the example of Polaroid's exclusive ownership of instant-film technology.
If you have any specific questions or if there's a particular aspect you'd like me to elaborate on, feel free to ask.
