Monopolistic Competition and Oligopoly

Four factors distinguish the market monopoly of competition from other market types:

1) a large number of sellers;

2) product differentiation;

3) relatively easy entry and exit from it;

4) perfect awareness of buyers and sellers on the market conditions.

The model and the very concept of "monopolistic competition" are due to the release in 1933 of the book by E. Chamberlin, "The theory of monopolistic competition."

Monopolistic competitor's product is differentiated by buyers distinguish any parameter. The real product differentiation suggests differences in their physical characteristics, such as the chemical composition of detergents, or different kinds of toothpaste, or face creams, etc. The artificial differentiation involves differences in packaging, brand, image, provides advertising.

The market has the characteristics of monopolistic competition and monopoly, and competition. He "monopoly" in the sense that every seller has a monopoly over their choice of goods (and hence some degree of monopoly power) and competitive, as there are numerous competitors that sell similar goods.

A distinctive feature of monopolistic competition is the presence of non-price competition between firms. The competition takes place on price and non-price criteria, technical specifications, quality of products, services, other terms of the sale, as well as its promotion.

A distinctive feature of oligopoly is that several large companies meet the bulk of demand. For this term "oligopoly" used by economists to describe the competition between the relatively small number of competitors.

In such a market structure of the company is large compared with the size of the total market, which they are servicing, alive, and in the case of large corporations, they are great not only relatively, but absolutely.

The fundamental effect of a small number of firms is that each firm is in the market for a position when its decisions have a major impact on competition. What makes one company, responds to other firms, often forcing them to react in unexpected ways. A key feature of oligopoly is that the actions of one firm have a direct impact on the others. This extends to all areas of competition: price, sales volume, market share, product differentiation, sales promotion strategy, innovation, service to customers, etc.

The second characteristic of the oligopolistic market is associated with a view of the product. Industry where firms produce standard products, the industry is called pure "oligopoly" (steel, cement, viscose, fuel, plywood, newsprint, industrial alcohol). If some firms dominate the market differentiated products, the industry called "differentiated oligopoly" (cars, toothpaste, cereal, cigarettes, televisions, soap).

Log in oligopolistic industries can be difficult, but possible. In industries with sophisticated technology, the best large-scale production costs are achieved with minimal bulk development, for which the firm must be large in size. Sign in such markets often leads to such capital costs that they cannot afford the small, newly established firms.

In an oligopolistic market, the managers of businesses always have a choice: either to coordinate their actions, or to follow their own independent competitive strategy. As a result, different results are possible: in the first case - the conspiracy, in the second - oligopolistic price war.

Collusion is a form of education cartel. The cartel is a formal organization of sellers who seek to restrict competition and create market conditions for members of the monopoly profits. Each member of the cartel, the expected benefits from market constraints in the form of profits above that which would have been received in the absence of the cartel. Maximum profit made as a result of the cartel, is the prevailing profit in pure monopoly. But in contrast to the monopoly cartel contains two or more firms, which have to come to agreement on the mode of action of the cartel.

In real oligopolistic markets there are a number of factors that reduce the effectiveness of the cartel: the legality of the cartel, the number of sellers, barriers to entry, the identity of production and costs, the stability and predictability of demand.