Monopolistic Competitive Markets

With oligopolies, as price approaches marginal cost, quantity approaches the socially efficient level of output. When cooperating, oligopolies lead to a quantity of output that is too low and a price that is too high. Therefore, lack of cooperation among firms in an oligopoly is the preferred outcome from the view of society. The oligopoly price is less than the price a monopoly would set but greater than the price in a competitive market structure. Oligopolists are better off cooperating, but oftentimes their own self-interest prevents them from doing this effectively. As each firm raises their production to gain a larger percentage of the market share, price falls. These firms are aware of this fact, though, and thus stop increasing production before producing up to the amount where price equals marginal cost. Therefore, the price of an oligopoly is less than the monopoly price and greater than the competitive price (equal to marginal cost). (Mankiw, 2021) When deciding on price and quantity of output, each oligopolist increases production until the output effect and the price effect balance, taking the other firms’ production as given. The output effect is when price is above marginal cost and selling one more unit of output will raise profit. The price effect is when raising production will increase the total amount sold and effectively lowers the prices and therefore the profit from all other units of output sold. If the output affect outweighs the price effect, the firm will increase production and if the price effect outweighs the output effect, the firm will either not raise, or they will decrease production. (Mankiw, 2021) Monopolistically competitive markets have many firms. Oligopolistic markets have few firms. Monopolistically competitive markets have differentiated products. Oligopolistic markets have similar or identical products. Monopolistically competitive markets maximize profit by producing the quantity of output at which marginal revenue equals marginal cost. Because the demand curve slopes downward, the price firms in monopolistically competitive markets will charge will exceed their marginal costs. Oligopolistic markets maximize profits by adjusting their quantity of output based on the other firms in the market and that is generally above marginal cost. This is why the oligopoly price is less than the price a monopoly would set but more than the price in a competitive market. Monopolistically competitive markets have free entry and exit into or out of the market. Oligopoly markets have relatively high barriers to entry, although not as high as a straight monopolistic market. (Mankiw, 2021) An example of a monopolistically competitive firm is novels. The publisher of a novel has the sole right to produce and sell that novel (effectively a monopoly), but because there are many publishers who publish many novels and there is free entry and exit in the market, it is said that novels are an example of a monopolistically competitive market structure. An example of an oligopolistic market is the market for crude oil. Most of the world’s oil is produced by just a few countries and is often described as a cartel – a group of firms acting in unison. Additionally, the product is identical between firms, as opposed to the product differentiation of a monopolistically competitive market. The barriers to entry in an oligopolistic market such as crude oil are plentiful due to economies of scale. (Mankiw, 2021) References Mankiw, N.G. (2020, January 1). Principles of Economics, 9th Edition, Chapter 17. Retrieved from https://ng.cengage.com/.

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