MONOPOLISTIC COMPETITION VS OLIGOPOLY – SIMILARITIES AND DIFFERENCES

Monopolistic competition is a market structure where there are many buyers and sellers of identical goods.

On the other hand, an oligopoly is a market structure in which few firms dominate the market output.

Similarities Between Monopolistic Competition And Oligopoly

1. Both are allocatively inefficient: Both Monopolistic competition and oligopoly are allocatively inefficient because they do not produce at the output level where price equals marginal cost.

2. Both are productively inefficient: Both monopolistic competitive firms and oligopolists are productively inefficient as they do not produce at the output where marginal cost equals average cost in the long-run

3. Imperfect knowledge: Monopolistic competitors and oligopolists have imperfect knowledge about the prevailing market conditions and the price being charged.

4. Both are price makers: Both Monopolistic competitive firms and oligopolists are prices because they have some form of control over the price.

5. Both have multiple firms: There is more than one firm in both markets. As a result, competition exists in both markets.

6. Both are unlikely to price discriminate: Price discrimination occurs when a seller charges different prices to different buyers due to reasons not related to the cost of production.

Monopolistic competitors and oligopolists are unlikely to price discriminate because they may lose market share if they do so

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Differences Between Monopolistic Competition And Oligopoly

1. Goods sold in monopolistic competition are slightly differentiated whereas goods sold in an oligopoly are either perfect differentiated or homogenous.

2. Low barriers to entry exist in monopolistic competition whereas high barriers to entry exist in oligopoly.

3. Goods sold in monopolistic competition are close substitutes while goods sold in an oligopoly can be perfect substitutes (in the case of pure oligopoly) or close substitutes (in the case of differentiated oligopoly)

4. While few firms exist in oligopolies oligopoly, large numbers of firms exist in monopolistic competition

5. The demand curve of a monopolistic competitive firm is downward-sloping indicating that there is an inverse relationship between demand and price.

On the contrary, the demand for oligopoly is not determinable due to the uncertainty that is associated with price competition.

6. Excess capacity is common in monopolistic competition whereas excess capacity is less likely to occur in oligopoly.

7. Non-price competition (such as advertising) is common in monopolistic competition whereas oligopoly may engage in price competition or non-price competition.

However, for an oligopolies, the danger of engaging in price competition is that it leads to price rigidity and price war.

8. Collusion is common in oligopolies since they are few firms in the market whereas collision is unlikely in monopolistic competition because they are many firms in the market.

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Tabular comparisons of monopolistic competition and oligopoly 

Market/featuresMonopolistic competition Oligopoly
Numbers of firmsManyfew
Demand curveDownward-slopingindeterminate
Price makerYesYes
Level of knowledgeimperfectImperfect
Barriers to entrylowhigh
Productively efficientnono
Nature of goodsslightly differentiatedhomogenous or slightly differentiated
Allocatively efficientnono
Excess capacityYesvery unlikely
Possibility of collusionnoyes
Price discriminationVery unlikelyVery unlikely
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