Comparison between monopolistic competition and oligopolistic competition
Monopolistic competition is a market structure where large number of firms sells differentiated products that are highly substitutes to one another but not perfect substitutes. There is a free entry and exist in the monopolistic competition, and the firms demand curves are downward sloping. Examples of a monopolistic competition are the firms producing clothing, toothpaste, restaurants etc. On the other hand, oligopolistic competition is a market structure where there are few firms competing among one another. There is a barrier of entry because of the economic of scale, patent, and the technology involved in setting up the firm and the presence of few firms give the firms advantage to make excess profits. Examples of oligopolistic competitive market structures are automobiles, steel, aluminium, petrochemicals, and electrical equipments. While there are few firms in the oligopolistic market, there are still competitions among firms. Example of the interest rates that the banks charge on loans reveals the competitive nature of the oligopolistic markets.
Interest rates are the prices that the banks charge for lending money to borrowers.
In the oligopolistic competitions, the interests rates that the bank charges large corporations for the short-term loans are called the prime rate. The changes in prime rates cause interest rates in the money markets to rise or fall substantially. The changes in the prime rates will make major banks to follow suit by changing their rates. The reactions of the major banks will make other banks to follow suit within few days. Changes in the interest rates will make the active banks to enter the market and non-active bank to exit the industry. (Totzek, 2011). In the long run, the firms in the oligopolistic market may form collusion to continue enjoy higher profits. For example, the interest rates charged by the commercial banks are very similar. The higher profits enjoyed by the commercial banks may not be affected with the change in the interest rates because major commercial banks charge the same interest rates on the money borrowed by customers.
However, in the monopolistic competitions, the increase in the interest rates will make the weaker firms to exist the market and strong firms to enter the market. In the contemporary business environment, many firms depend on the bank loans to raise capital. Since there are fierce competitions among firms in the monopolistic competitive markets, firms will likely to raise capital from banks to satisfy the market obligations such as advertising, packaging etc. With increase in the interest rates, many weak firms will be forced to exit the market.
Under the monopolistic competition, change in the consumer income has different impact on product prices. In the short run, when entry into the market may not be possible, the increase in the consumer income make the demand for the products to be less elastic because firms will charge high prices for their products, and thereby making abnormal profits. From the illustration in Fig 1, in the short run, firms make profit when MR= MC and the MR < P. There is an also downward sloping demand of monopolistic competition where the demand is relative elastic because of the good substitutes.
Fig 1: Monopolistic Competition in the Short run and Long run
However, in the long run, more firms will enter the markets because firms in the monopolistic competitive market are making higher profits, thereby leading to tougher competitions among firms. To attract more customers, firm will decrease their prices leading to the decrease in profits. The weaker firms will exit the market because of the decrease in profits.(Tarasov, 2011). From the illustration in the Fig 1, there will be no economic profit because P = AC and more firms are attracted to the industry which makes the price to fall.
Likewise the behaviour of the monopolistic competitive markets, the changes in the consumer income also makes the firms in the oligopolistic markets to charge higher prices in the short run. For example, if there is increase in the consumer income, the oligopolistic firms will increase the price of their products to make higher profits since there is increase in the purchasing power of consumers based on the increase in wages. Unlike monopolistic market competition where weaker firms exist market in long run when there is decrease in…
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