Imperfect Competition: Oligopolies and Monopolistic Competition

Oligopolies

• Dominated by several suppliers (a few sellers).
• These few sellers control 70-80% of the market.
• Contrast:
  • Monopoly: One seller.
  • Oligopoly: Two, three, or four sellers dominating the market.
• High capital costs make it difficult for new companies to enter the market.
• Goods and services provided by the sellers are nearly identical (very similar).
  • Example: Coca-Cola and Pepsi.
• Competition is not based on price (non-price competition).
  • Pepsi and Coca-Cola are similarly priced.
  • Competition is based on product differentiation.
  • Based on consumer perception of value.
• Non-price competition:
  • Companies try to get consumers to perceive a different value of one product over another.
  • Advertising is the main type of non-price competition.
• Advantages of oligopolies: More stable prices.
• Interdependence:
  • All companies are interdependent.
  • A change in one company will affect the others.
  • If one company goes out of business, it significantly impacts the others.
  • This interdependence can lead to:
    • Price wars.
    • Illegal collusion: Teaming up to raise prices (e.g., tobacco suppliers).

Examples of Oligopolies

• Tobacco products
• Breakfast cereals (General Mills, Post)
• Domestic motor vehicles (GMC, Ford)
• Soft drinks (Pepsi vs. Coke)
• Aluminum

Monopolistic Competition

• Most common form of market structure in the United States.
• Characteristics:
  • Many sellers (20-30 companies selling the same product).
  • Easy entry into the market.
  • Some price control by the seller.
    • Monopoly: Complete price control.
    • Perfect competition: No price control.
    • Oligopoly: Some control, especially with collusion.
  • Non-price competition.
  • Differentiated products: Firms make products that are close but not perfect substitutes.
• Examples:
  • Hotels
  • Clothing
  • Shoes
  • Hairdressers
  • Restaurants
• Competition:
  • Product differentiation.
  • Advertising (highlighting special characteristics).
• Non-price competition is vigorous; the defining characteristic.
• Advertising is most important in monopolistic competition.
• Advertising aims to convince consumers of the superiority of a product.
• Advertising enables a company to charge more than the market price.
• Brand Loyalty:
  • If a company gets brand loyalty:
    • Demand for their product increases.
    • The firm gains more control over its price.
    • Demand becomes more elastic (responsive to price changes).