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TOPIC : MONOPOLY VS OLIGOPOLY Worked by: Brikena PlakuAccepted by: Ariana Nepravishta

Republic of Albania Agricultural University of TiranaFaculty of Economy and AgribusinessTirane, 2016

Monopolyandoligopolyare economic market conditions.Monopolyis defined by the dominance of just one seller in the market;oligopolyis an economic situation where a number of sellers populate the market.In simple terms, Monopoly means sole to sell. It is a situation of market where there exist only one seller in the market for a particular commodity or service, supplying goods to many customers and he is having ultimate control over it. The product or service offered by the seller is unique, which donot have any close substitute. Due to the dominance in the whole market, they enjoy the benefit of large scale production. The salient features of monopoly are as under:There is only one seller in the whole market who produces or supplies a product.Entry to such a market is restricted due to factors like license, ownership of resources, etc.There are no close substitutes of the commodity offered by the monopolist.In a monopoly market, there is no competition and so the prices of products are overcharged by the monopolist. Under this market structure, pricediscrimination exists in a way that the price varies from customers to customers for the same product. The prices also differentiates according to thequantity demanded by the buyer i.e. if the quantity demanded is high, then low price is charged and vice versa. This practice is followed to reap maximum revenue, to dispose off the excess stock or to capture foreign markets.Definition of

The advantages of monopoliesMonopolies can be defended on the following grounds:They can benefit fromeconomies of scale, and may be natural monopolies, so it may be argued that it is best for them to remain monopolies to avoid the wasteful duplication of infrastructure that would happen if new firms were encouraged to build their own infrastructure.Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuableexport revenues. This is certainly the case with Microsoft.According to Austrian economistJoseph Schumpeter, inefficient firms, including monopolies, would eventually be replaced by more efficient and effective firms through a process calledcreative destruction.It has been consistently argued by some economists that monopoly power is required to generate dynamic efficiency, that is,technological progressiveness.

The disadvantages of monopoly to the consumerMonopolies can be criticized because of their potential negative effects on the consumer, including:Restricting output onto the market.Charging a higher price than in a more competitive market.Reducingconsumer surplusand economic welfare.Restricting choice for consumers.Reducing consumer sovereignty.

In simple terms oligopoly refers to competition among the few. It is an economic situation where there is a small number of firms, selling competingproducts in the market. Oligopoly exist in the market, where there are 2 to 10 sellers, selling identical, or slightly different products in the market.According to experts, oligopoly is defined as a situation when the firm sets its market policy, as per the anticipated behavior of its competitors.In an oligopolistic market, a firm has to rely on other firms for taking decisions regarding prices because a slightest change in the price of rivals maycause loss to the firm. The other feature of this type of market is the use of marketing tools like advertising to get the maximum market share. Each andevery firm of the industry, closely observes the moves and actions of the competitors in order to plan its steps according to the behavior of itsrivals.Definition of

The following are the various forms of oligopoly:

Collusive oligopolyis when the firm act, in cooperation with other firms in the market in setting the price and output.Competitive oligopolyis when the cooperation is missing between firms and they compete with one another.Perfect oligopolyis when the product is identical in nature.Imperfect oligopolyis when firms sell different products.Open oligopolyis when the new firms are free to enter.Closed oligopolyis when restrictions are there for entering into the market.Others includepartial or full oligopoly,syndicated or organized oligopolyetc.The advantages of oligopoliesHowever, oligopolies may provide the following benefits:Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures, such as lower prices. Even though there are a few firms, making the market uncompetitive, their behavior may be highly competitive.Oligopolists may be dynamically efficient in terms of innovation and new product and process development. The super-normal profits they generate may be used to innovate, in which case the consumer may gain.Price stabilitymay bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilizes their expenditure, which may help stabilize the trade cycle.

The disadvantages of oligopoliesOligopolies can be criticized on a number of obvious grounds, including:High concentration reduces consumer choice.Cartel-like behavior reduces competition and can lead to higher prices and reduced output.Given the lack of competition, oligopolists may be free to engage in the manipulation of consumer decision making. By making decisions more complex - such asfinancial decisions about mortgages - individual consumers fall back on heuristicsand rule of thumb processes, which can lead to decision making biasand irrational behavior, including making purchases which add no utility or even harm the individual consumer.Firms can be prevented from entering a market because of deliberatebarriers to entry.There is a potential loss of economic welfare.Oligopolists may be allocative and productivelyinefficient.The following are the major differences between monopoly and oligopoly:Monopoly refers to a type of market, having a single seller dominating the whole market. The economic structure where there are a handful of sellers inthe market selling similar products and competing among themselves.In monopoly as there is a sole seller of a product or provider of service the competition does not exist at all. On the other hand, in oligopoly a slightcompetition is there among the firms.In monopoly there is only one player in the entire market, but in oligopoly the range of players is 2 10, in the market.In monopoly, the seller dominates the market by selling a unique product for which no substitute is available. Conversely, in oligopoly the product or service offered by the firm are either similar or different having close substitutes.In monopoly the price discrimination exist, different customers have to pay different price for the same product. In contrast to oligopoly, priceremains fixed for a long time.In an oligopoly, the firms sets the product price on the basis of price of the same product offered by the rival seller in the market, which is just opposite incase of monopoly, as there are no rivals.The reasons for restriction on the entry in the monopoly market can be legal, economic or institutional but the major for barrier in oligopoly iseconomies of scale.Key Differences Between Monopoly and OligopolyMonopoly

OligopolyMeaningAn economic market condition where one seller dominates the entire market.An economic market condition where numerous sellers have their presence in one single market. A small number of large firms that dominate the industry.PricesHigh prices may be charged since there is no competitionModerate/fair pricing due to competition in market. But much higher than perfect competition (where there is a large number of buyers and sellers)CharacteristicsA single firm controls a large market share in the industry, thereby gaining the ability to set price.A small number of firms dominate the industry. These firms compete with each other based on product differentiation, price, customer service etc.Barriers to entryA monopoly usually exists when barriers to entry are very high - either due to technology, patents, distribution overheads, government regulation or capital-intensive nature of the industry.Barriers to entry are very high as it is difficult to enter the industry because of economies of scale.Sources of PowerMarket making ability by virtue of being virtually the only viable seller in the industry.Market making ability because of very few firms in the industry. Each firm can therefore significantly influence the market by setting price or production quantity.ExamplesMicrosoft (Operating systems, productivity suites), Google (web search, search advertising), DeBeers (diamonds), Monsanto (seeds), Long Island Rail Road etc.Health insurers, wireless carriers, beer (Anheuser-Busch and MillerCoors), media (TV broadcasting, book publishing, movies), etc.11

http://en.wikipedia.org/wiki/Monopoly#Monopoly_versus_competitive_marketshttp://en.wikipedia.org/wiki/Oligopoly http://www.economicsonline.co.uk/Business_economics/Monopoly.htmlhttp://www.economicsonline.co.uk/Business_economics/Oligopoly.htmlReferences: