Monopoly, Oligopoly, and Monopolistic Competition Notes

Monopoly, Oligopoly, and Monopolistic Competition

This section describes the concepts and characteristics of pure monopolies, oligopolies, and monopolistic competition. Perfect competition is rare. Most industries in the U.S. are a form of imperfect competition.

Imperfect Competition

Three types of imperfect competition exist, differing in the degree of competition and seller control over price:

• Monopolies

• Oligopolies

• Monopolistic competition

Pure Monopolies

Pure monopolies represent the most extreme form of imperfect competition, opposite to perfect competition.

• Single Seller:

  • A single seller controls the supply and price of a product.

  • They can influence market quantity and price.

• No Substitutes:

  • There are no competitors offering closely replaceable goods or services.

• Barriers to Entry:

  • Competitors cannot enter the market due to:

    • Government regulations

    • Large initial investment requirements

    • Ownership of raw materials

  • A monopoly has almost complete control over the market price.

• Price Control:

  • They can raise prices without fear of competition.

  • The seller will charge more than the equilibrium price to maximize profit.

  • However, the law of demand still applies. If the price is too high, people will buy less.

• Law of Demand:

  • As the price goes up, people are still going to buy less. So the law of demand still applies

Types of Monopolies

There are four types of monopolies:

• Natural Monopolies

• Government Monopolies

• Technological Monopolies

• Geographic Monopolies

Natural Monopolies

• The government gives exclusive rights to a company to provide a public good or service (e.g., utilities like gas and electricity, bus services, cable).

• They operate with economies of scale, producing the largest amount of a good for the lowest cost.

• The government allows natural monopolies to ensure services like electricity are affordable.

Government Monopolies

• Similar to natural monopolies, they provide a public good but are held and run by the government.

• Examples include the construction and maintenance of roads and bridges.

Technological Monopolies

• Result from inventions that are patented and copyrighted.

• A patent gives the inventor the sole right to use their technology.

Geographic Monopolies

• Created due to geographic barriers for competition.

• Example: A grocery store in a remote Alaskan village where the profit is too small to attract other companies.

• They're geographically isolated.

Modern Relevance

Monopolies are less important now than in the past, and they tend not to last very long anymore.