Economics Monopolistic Competition Questions Long
Monopolistic competition and oligopoly are two different market structures that exist in the field of economics. While both involve a certain level of market power, they differ in terms of the number of firms, product differentiation, barriers to entry, and the behavior of firms.
Monopolistic competition is a market structure characterized by a large number of firms competing against each other. Each firm produces a slightly differentiated product, which means that there is some level of product differentiation in the market. This differentiation can be based on factors such as branding, packaging, quality, or location. Firms in monopolistic competition have some degree of control over the price of their product, but they face a relatively elastic demand curve. This means that if a firm increases its price, consumers have the option to switch to a similar product offered by a competitor. As a result, firms in monopolistic competition engage in non-price competition, such as advertising and product differentiation, to attract customers. There are no significant barriers to entry or exit in monopolistic competition, allowing new firms to enter the market easily.
On the other hand, oligopoly is a market structure characterized by a small number of large firms dominating the market. These firms have a significant market share and often produce similar or identical products. Unlike monopolistic competition, there is limited product differentiation in oligopoly. Due to the small number of firms, each firm's actions have a significant impact on the market. This leads to interdependence among firms, as they must consider the reactions of their competitors when making decisions. Oligopolistic firms often engage in strategic behavior, such as price collusion or non-price competition, to maintain their market power. Barriers to entry in oligopoly are usually high, which makes it difficult for new firms to enter the market and compete with existing firms.
In summary, monopolistic competition and oligopoly differ in terms of the number of firms, product differentiation, barriers to entry, and the behavior of firms. Monopolistic competition involves a large number of firms with differentiated products, engaging in non-price competition, and facing relatively elastic demand. Oligopoly, on the other hand, consists of a small number of firms with limited product differentiation, engaging in strategic behavior, and facing high barriers to entry.